krebscycle

From Wall Street Journal

REMARKS TO:

INSOL INTERNATIONAL ANNUAL REGIONAL CONFERENCE

FAIRMONT SCOTTSDALE PRINCESS SCOTTSDALE, ARIZONA
MAY 21, 2006

RON BLOOM SPECIAL ASSISTANT TO THE PRESIDENT UNITED STEELWORKERS

Let me of course start by thanking you for inviting me to speak to you here today. I have had the opportunity to work with both of the conference chairs and I am sure that they and the conference committee have put together, with the possible exception of the keynote speaker, an excellent program.  And while the conference chairs are both responsible for me being here, I ask that you not hold that against them.  I bring you greetings from the city where I work  Pittsburgh, Pennsylvania, which is the home of the Pittsburgh Steelers and was, until his recent untimely death also the home of Mister Rodgers.  Now there is a clever and important connection between those two and it elegantly ties together
everything I am about to say. Unfortunately, I have no idea what it is.  I want to spend my few minutes this morning sharing with you a perspective on insolvency, one that may perhaps be a little different from that provided by some of the other speakers at this conference.

Now doing this poses for me a bit of a dilemma.  I did a speech like this a couple of years ago to a group of steel executives. I told them all about my union, how we see the world, what our goals and objectives are, how to get along with us and mostly at least, I told them the truth  or at least my truth. The problem was, people paid attention – man bites dog is always a more interesting story – and worse I wrote it down and made copies available. Since then, on more than one occasion, I have had to hear my remarks played back to me to justify a particular position being taken across the bargaining table.

So today, as my first of many non-negotiable demands  I am after all a union guy and don’t want to disappoint you – I must insist that nobody pay too close attention nor take too seriously what I am about to say.  I take your silence as assent and on that basis let me share with you some thoughts on insolvency
and restructuring from a labor perspective. And seriously, it really is only a perspective. Both within my union and most certainly between unions there is a wide diversity of views about how insolvency should be looked at and how unions ought to view their role in the process. 

Let me start by telling you a little bit about my union. Most of you probably know us as the steelworkers union or perhaps the united steelworkers of America. However, as the result of a recent merger, we just adopted a truly god-awful name  the united steel, paper and forestry, rubber, manufacturing, energy, allied industrial and service workers international union.  Candidly, that is the first and I hope last time I ever say that name, as I have deliberately chosen
not to learn or to use it. But the name is in fact useful, as it does indicate the wide range of industries where we have significant membership.  The union’s roots  basic steelmaking  now represent a relatively small and not even the largest single fraction of our membership. In addition to steel, spread throughout the united states and Canada, we have large numbers of members in the paper, aluminum, tire, glass, mining, oil, chemical and auto parts industries. And while we are largely in private sector manufacturing, we also have meaningful membership in the service sector, particularly health care and higher education and even a decent number of public employees. In all we have almost 850,000 members and about that many retirees. 

Our union is extremely diverse. Our members are generally either immigrants or the children or grand-children of immigrants and we work hard to take the best from all of their cultures.  While there are too many to innumerate, the wisdom of three in particular are worth mentioning. From the Irish we have learned: “don’t get mad, get even. From the Italians we take the lesson that revenge is a dish best served cold.  And from the Serbs, many of us, as we get older, have become afflicted with what is called Serbian alzeihiemer’s  you forget everything but the grudges.

I want to talk next about square pegs and round holes; involvement and commitment; and chickens and pigs.  Insolvency proceeding generally divide their participants into debtors and creditors. The process usually begins when a company  the debtor – believes, or until very recently in the case of Canada, was able to convince Justice Farley, that it is insolvent  that it cannot pay its debts when due and that the sum of all the claims against it exceeds the cash generating value, either in operation or as sold to third parties, of its assets. On this basis, the company asks the court for a supervised process so that it can figure out how to divide up whatever value it does have amongst those various creditors.  The problem is that labor, particularly when it has an organized voice, does not fit easily into this equation. 

It can certainly be argued that we are creditors. We have sometimes quite substantial deferred wage claims, most significantly in the form of pensions and retiree health care, as well as claims for unpaid wages, severance, vacation and other similar obligations. These deferred wage claims are based on promises that were made to people who no longer work for the company, as well as to those still holding jobs. But while these obligations can be quantified it is hard to call them
traditional creditor claims. 

Before banks and bondholders lend companies money they explicitly assess the likelihood that the company’s obligation will be honored. Based on their assessment, with full access to all the information they deem relevant, they then write covenants regulating the company’s behavior. Often, they secure the company’s commitments with liens on the company’s assets and finally they charge interest to reward them for the risks they are taking.  Then, each day the market re-prices the company’s obligation based on the best information available. This allows those who like the risk-reward ratio to take it and those who don’t to
liquidate their position and move on. 

Shareholders too, have at any point in time, both no restrictions on their ability and of course no compunction about selling their ownership stake to someone who wants to have it.  Thus every day, when the market closes, all financial stakeholders have affirmatively chosen  that day  to purchase their position at whatever price the market set for it  either because they actually did so or because they choose not to sell.  Now compare this to a worker’s deferred wage claims.  Those already retired are the ultimate hostage lenders, with essentially no rights. They worked a lifetime and deferred a significant amount of current compensation in exchange for the company’s promise that, upon their retirement, they would be paid a fixed stream of cash and provided with help with their medical bills.  Then, without their knowledge or consent, the company choose to not set aside enough money to honor that promise. In effect, the company borrowed money from them without even discussing the terms of the loan.  Further, if the retiree thinks that the company is not being prudent, he or she has no ability to take the company’s promise, convert it to its present value and sell it to someone who would like to own it. 

So what we have is a bunch of old men and widows being forced to lend the company, for whom they worked a lifetime, some portion of the value of their pension and their health care. This loan is made on terms on which they have no input and they have no ability to liquidate their position. I am guessing that not too many of you would advise your clients to do that deal. 

Later the company decides that it is insolvent and announces that these “creditors ought to compromise their claim so that more value can be provided to a bunch of hedge funds who bought their claims at ten cents on the dollar and have owned them for all of ten minutes before loudly proclaiming their inviolate right to be paid back at par plus accrued.  Yea, we are just the same.  And then we have our active members and the wages and benefits associated with the work currently being performed. The debtor, presumably on behalf of other creditors, often challenges these wages and benefits as being unsustainable in light of the company’s circumstance.  But once again there is really no way to compare that claim to that of a financial creditor. The worker invests 20 years of his life, earns a wage that may be slightly better than average, buys a home in the community and at the time of the insolvency was looking forward to working another
ten or fifteen years, then collecting the deferred wages that I referred to above.  How do we value that claim?  Some might say that any wages and benefits which workers receive that are above those which the market provides, should, in light of the company’s circumstance, be adjusted accordingly.

That, of course, is an argument that we can never accept. For if we were to accept it, we would eliminate all logic for unions in the first place. And while that may, for most in this room, be an alluring prospect, I am afraid that at least for a while, that option is not available.  We certainly acknowledge that we live in a global market economy, but we make no apology for our belief that the market does not adequately express the value of labor. This is the fundamental reason why workers act collectively – so that they can achieve more for themselves than the market would otherwise provide.  Now we happen to believe that this structure is an intrinsic part of a democratic and just society.

But whether you agree with that or not, the fact is that in normal times, and even more so in an insolvency, when everything is both figuratively and literally up for grabs, you should expect that we will use our collective strength to protect what we have worked so hard to achieve. 

I also cannot help noting that I find it more than a little incongruous to be told by someone making more in an hour than a pensioner receives in a month that pension benefits and the union who helped secure them are the cause of the company’s problem.  Particularly when we both know that the wage of the person making that point is significantly related to the strong union to which he or she belongs. This collective organization restricts supply into the profession through having the members of the profession control the licensing process, thus allowing those authorized to charge for the service to receive dramatically above market wages. Classic monopoly behavior and judging by our surrounds today, it works.  To compare the circumstance of an active worker to that of a financial stakeholder, who often points out that if the company fails that the worker can always just get another job and that no one made the worker take his job in the first place, is like comparing the rich and the poor and observing they both have the same right to sleep under a bridge at night.  Think of it this way – financial investors are involved, workers are committed. This difference is best illustrated when you have a breakfast of bacon and eggs. The chicken is involved the pig is committed.  Just like the rich and poor are different, so too are labor and capital and it is truly hard to drive the square peg which is labor in the round hole of being a creditor.

Now I am not saying that we do not have a role to play. In fact, with the notable exception of one of our Canadian local unions, we generally take the modest view that it is, as they say, all about us and that we are in fact the logical center of the restructuring process.  And why not? We have the most to win and the most to lose. Loss of promised benefits to retirees can literally mean destitution and in the U.S., loss of basic medical care. And numerous studies have shown that workers in their 40’s and 50’s who lose these kinds of jobs will suffer permanent and dramatic loss in their lifetime earnings.

The problem is that when I say all that, people often conclude that with that much to lose we can be expected to do whatever it takes to allow the company to survive  to accept whatever slice we are given and allow financial creditors to maximize their recovery at our expense.  As some of you may have heard  at least in the steelworkers union, it doesn’t quite work that way. In the last ten years, over 300 steelworker employers have sought protection under chapter 11 or CCAA. Although that is a small fraction of the roughly 5,000 employers who have agreements with our union, it is a big enough number that we have had to develop some general principles to guide our behavior.

And while the rules are different in the us than they are in Canada, mostly because as near as we can figure out, in Canada there are no rules  the players are increasingly the same.  So, if you or your clients are involved with the insolvency of a steelworker represented company, need some help in finding a round or square hole into which to try to drive us and recognizing that in the application of our principles we are firm but flexible, let me give you some advice.  First, we are big believers in dentist chair bargaining. For those of you not familiar with this approach, it is inspired by the story of the man who walks into his dentist’s office, grabs the dentist by the balls and says, “now let’s not hurt each other.

We do have a lot to lose and we and everybody else knows it. But what you need to understand is that we are willing to lose it.  Put another way, like everyone else, we like win-lose when we win. And we are ok with winwin.  But please understand that if we do not win, in the service of helping you remember us for
the next time, we are prepared for lose-lose.  Second, we are for sale. We are easy, but we are not cheap. We are not shy and we know how to make a deal.  Our collective bargaining agreements must ultimately be with companies and so our first and natural instinct is to make a deal with incumbent management, as they are usually the devil we know. If we believe that management is in favor of a reorganization that avoids, or at least minimizes the harm done to our members and retirees, then that is probably where we will go.  But management is often the guys who got the company into trouble in the first place. Most
companies that fail are poor at all aspects of their jobs and believe it or not disrespecting workers often goes hand in hand with disrespecting creditors and shareholders. So we are also willing to listen and in fact have even been known to seek out creditors and discuss directly with them how to divide up the pie.

In most of the insolvencies with which we are involved the secured leaders have protected themselves and therefore from our perspective they are not the focus of our activities.  The more interesting dynamic is with unsecured creditors who like us often have much to gain if there is a successful restructuring and have at least something to lose if there is not.

So if you have a proposition there is no need with us to go through Shaw’s demonstration of who we really are. We admit it. Just tell us how what you are offering is better for us than the best deal then on the table and we are ready to do business.  Third, we are not fiduciaries. That does not mean that we do not have legal duties and for us even more importantly political responsibilities, and dare I say it moral obligations, to our members and retirees. It just means that our obligations are not strictly the same as those owed by legal fiduciaries. Our commitments, which as I said we take extremely seriously, do give us somewhat more flexibility, and we are not afraid to use it.

Finally, we are not a common carrier. If one of the necessary elements of a reorganization is a new or modified collective bargaining agreement, we have absolutely no obligation and in fact are highly unlikely to offer the same agreement to all who are interested. We have definitive views on who should own companies, what their operating plans should be and how the company should be managed and capitalized  and we are prepared to act on those views.  And why shouldn’t we? As the ultimate patient (read: immobile) investor, who has more right to care about these things.  So if either management, existing creditors or new investors want to come forward, we are absolutely prepared to offer you a contract and perhaps more importantly, for the right price we are prepared to forsake all others and make you the exclusive recipient of our love and affection.  Now, like most marriages, we occasionally have a wandering eye, but I think you will find, if you talk to those who have tried this approach, that we are in fact more faithful than the average
participant in this process  which of course is not setting the bar very high, but hey, in the land of the blind, the one-eyed man is king.  And I think you will also find that we are actually a good partner.

Now I am not going to bother trying to convince you that you should want a union. But there is enormous evidence that if youhave one, working with us in a respectful way produces dramatically better results for all stakeholders than any other alternative.  

Let me close with a story about collective bargaining to help prepare you for your dealings with my union.  It concerns the union representative who is assigned to work with a local union to help them negotiate a contract.
He goes to the local union meeting to ask the members about their priorities and is told, in no uncertain terms that because of the difficult and dangerous nature of the work, the highest priority is getting people more time off.  Well, he goes into bargaining and does battle with the employer. Luckily, the market for the
company’s product is very hot and the company really cannot afford a strike. And so, after pounding away, the union rep comes back to the local union meeting to report a great victory.  sisters and brothers, he says, I have great news. We really bent the company over. I am happy to report that under the new agreement, we will only have to work on Mondays.

There is dead silence in the room and then a hand goes up. yes, brother the rep says. The questioner stands, every Monday?  Thank you very much.