Open, honest communication key to surviving two-year restructuring
Into the blast furnace: Courtney Pratt, former Stelco CEO and author of Into the Blast Furnace: The Forging of a CEO’s Conscience, spoke in October at a Strategic Capability Network event about how he navigated one of the longest and most complicated corporate restructurings in Canadian history. For more information, visit www.scnetwork.ca.
By Shannon Klie
When Hamilton-based steel manufacturer Stelco (now U.S. Steel Canada) entered bankruptcy protection in January 2004, Courtney Pratt, who was the CEO at the time, thought it would take one year for the company to develop a restructuring plan all stakeholders could agree to.
But it would be more than two years and two months before Stelco would finally exit bankruptcy protection in what turned out to be one of the longest and most complicated corporate restructurings in Canadian history.
“We did come out a stronger company and pensions were preserved and protected,” said Pratt, who is now chairman at HR consulting firm Knightsbridge Human Capital in Toronto.
Even though it took a long time, the process was successful because he continuously communicated with all stakeholders, not only in writing but face-to-face, and was honest and consistent in his words and actions, said Pratt.
At one time, Stelco was one of the great Canadian manufacturing companies and it was considered the economic heart of Hamilton since its founding in 1910, said Pratt at a recent Strategic Capability Network event in Toronto.
But in the summer of 2003, Stelco’s CEO resigned and the company was in dire financial straights. Costs were out of control relative to the competition and Stelco’s pension deficit was enormous, said Pratt.
With such a dark cloud hanging over the company, finding a new CEO was next to impossible. The board asked Pratt, who was the CEO at Toronto Hydro and a member of Stelco’s board of directors, to step into the top role in January 2004.
At that time, Stelco was projected to run out of cash by November. Bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA) was the best option, even if it meant handing over control of the company to the court and creditors, who would have to vote on the company’s restructuring plan, said Pratt.
It would have been irresponsible not to restructure while the company still had some money and there was a greater chance of saving the company, he said.
“The platform was burning,” said Pratt.
But shortly after the company entered bankruptcy protection, the climate changed. Steel prices increased dramatically, reaching historical highs, and the company started to make money.
“The platform was no longer burning,” he said. “There were no incentives to get the deal done.”
But if the company didn’t have a good restructuring plan in place, it would be right back where it started when the market changed again, which it was bound to do, said Pratt.
In most bankruptcy protection cases, the company only has to worry about having creditors onside and supporting the restructuring plan. But with Stelco, there were effectively three parties that could veto the restructuring plan: the union, the provincial government and creditors.
The collective agreement with Stelco’s Lake Erie workers, represented by United Steel Workers Local 8782, had expired and the union said it wouldn’t do a deal until there was a restructuring plan in place.
Stelco’s pension plan was covered by Ontario’s Pension Benefits Guarantee Fund, but with a pension deficit of $1.2 billion, the Ontario government wanted to see a new pension plan before allowing the company to restructure.
And while all companies entering bankruptcy protection have creditors, many of Stelco’s creditors were hedge fund managers who saw an opportunity to make money off the restructuring. This meant the players changed as hedge funds bought and sold company shares and Pratt never knew who he would be dealing with.
Stelco had to come up with a plan that would satisfy all three parties and still keep in mind the interests of all workers, customers, suppliers and shareholders.
During bankruptcy protection, usually the goal is to minimize concessions. But because the economic outlook had changed, all parties were trying to maximize gains, which added another layer of complexity, said Pratt.
“We had to come out of this a better, more competitive company,” he said. He didn’t want Stelco to end up back in CCAA in two years’ time.
Pratt also wanted to go through the process while maintaining his values and avoiding the antagonistic dealings that defined the Air Canada restructuring in 2004.
“We decided we did not want that to happen. We wanted to take the high road,” he said. “We stayed out of the mud.”
To that end, Pratt was in court every time there was a hearing and he focused on communicating with all stakeholders in a responsive and honest way, on a regular basis.
“That was absolutely fundamental to what we were trying to do,” he said.
Pratt wrote a letter to employees almost every week, held regular town hall meetings, responded to employees’ questions, put out media releases almost every week and held weekly conference calls for customers and suppliers.
He also regularly appeared on a local radio show.
“By going on that show, I was actually talking to the community in a way I couldn’t by giving three-minute interviews to the Hamilton Spectator or TV shows,” said Pratt.
In September 2005, Stelco presented a plan to the provincial government and the union. After six months of complicated negotiations, the creditors approved the deal.
While there were many people who contributed to the success of the process, including the supervising judge, Justice James Farley, mediator George Adams and Stelco’s board (which met more than 100 times over two years), Stelco’s head of HR played a key role, said Pratt.
The head of HR had developed excellent relationships with various people, including the union, could talk to them in a way Pratt couldn’t and had insight into what mattered most to them.
“Having a pulse on the organization is very, very important,” said Pratt.
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Endangered employers (Organizational effectiveness)
By Tom Tavares
Once a Canadian icon, Stelco failed to keep its technology current and its costs under control. Facing bankruptcy protection in 2003, the board appointed a new CEO to forge a restructuring plan with stakeholders. In 2007, U.S. Steel acquired Stelco and guaranteed the pensions of employees.
Stelco’s story was a familiar tale. Industry-wide patterns of managerial neglect extended beyond the steel business. They were evident among domestic automakers that had to be bailed out last year after decades of eroding market share.
Management snafus can be explosive rather than gradual. The tech bubble burst a decade ago, followed by a rash of breakdowns in the internal controls of corporations and accounting firms. In 2008, the financial services industry melted down, shaking up the global economy. This year, we have seen failed airline bombings, BP’s massive oil leak and Toyota’s debacle.
Toyota’s fall from grace is especially worrying. If an industry leader can be brought to its knees, no one is immune to the threat. So what happened? Toyota’s CEO said the firm focused too much on growth and lost touch with the organization.
When leaders are isolated, the 10 per cent of people in management are no longer available to support the 90 per cent of employees in making improvements. At Toyota, where internal discipline is highly valued, crises developed quickly. In North America, leaders tend to see managing internally as a “soft issue” and approach it on the basis of personal style.
When the 10 per cent of people in management try to fix 100 per cent of the problems, they become more isolated. Companies stuck in this impossible ratio have common symptoms: confusion about the direction of this business, a growing backlog of issues, inconsistency in executing changes and unsustainable levels of activity.
However, management can change. When leaders reverse this impossible ratio and enlist the other 90 per cent of minds in a company, fewer problems fester and people focus on moving the business forward.
We are trying to address complex challenges with a fraction of the intelligence available in companies. With a fresh blueprint for managing, leaders can create a substantial improvement in performance and keep their organizations off the endangered list.
Tom Tavares is SCNetwork’s lead commentator on organizational effectiveness and a senior organizational psychologist. In addition to managing in large corporations, consulting in varied industries and coaching executives, he is also the author of The Mind Field, published by Carswell. He can be reached at [email protected].
How does an HR exec end up as CEO? (Leadership in action)
By Dave Crisp
When a company, like Stelco, falls into a crisis so deep it can’t see any way out of a morass of competing stakeholder interests and realizes it needs someone who is “good with people” and likes that work, it turns to a seasoned CEO who was once a vice-president of HR
This is partly how Courtney Pratt ended up as CEO at Stelco during the company’s most difficult hour.
But this is ironic, in light of the distaste most interviewers have for HR applicants who say, “I want to do HR because I like people.” I’ve heard virtually every HR executive make fun of this comment at one time or another.
But it’s one paradox, not the whole story. Take the light bulb joke: “How many psychiatrists does it take to change a light bulb? Just one, but the light bulb really has to want to change.” Lots of HR people want to know how to become a CEO but do they really want to be one?
Ideally, a CEO should like people. Business, fundamentally, is about good relationships, not just with suppliers and customers but staff as well. This is something many CEOs don’t seem to understand or mistakenly believe the issue will take care of itself.
I was struck by a comment from Don Draper, the key boss in the TV hit Mad Men. His best subordinate was complaining he’d hogged credit for her advertising idea to win an award. He dismissed her disappointment by saying, “That’s what the money is for.” All too many bosses feel pay should make up for lack of recognition and appreciation of employees’ work.
There seems to be a misperception stuck in the minds of both line managers and HR executives — and we can include boards of directors in this — that somehow when you move into the line for succession to the top, you shouldn’t give in to caring about people as it might get in the way of logical business decisions. Executives pay lip service to the fact this shouldn’t be the case, but the vast majority on both sides of the supposed “divide” continue to behave and talk to each other as if the difference is real and inevitable.
Hence, many HR executives continue to have serious doubts about whether they’d want a hard-nosed CEO role and, in any event, boards and senior teams brush off the idea because HR is not seen as being tough or business-like enough.
We pretty much all know combining the two skill sets should result in an ideal senior operator but, apparently, we aren’t sure enough to make the effort to cross-train and demand both sets of skills in both types of executives.
In fact, we ought to see boards and succession planning groups making this combination of skills mandatory — and then we’d see quite a few people both aspire to and step up with both skill sets.
As long as we fail to make it a real expectation, we will find executives on both sides of the divide arriving at senior roles where they are less than optimally effective. It’s great to see one who walked the talk, but they seem all too few.
Dave Crisp is SCNetwork’s lead commentator on leadership in action. He shows clients how to improve results with better HR management and leadership. He has a wealth of experience, including 14 years leading HR at Hudson Bay Co., where he took the 70,000-employee retailer to “best company to work for” status. For more information, visit www.CrispStrategies.com.
By Karen Gorsline
There is no doubt the situation at Stelco was one that tested the mettle of those in leadership roles. But, ironically, as the CEO’s story unfolded, what was most compelling was the strategic capability perspective and what it meant to operate when there was no crisis or burning platform.
The ‘burning platform’ disappears: After Stelco went into bankruptcy protection, the steel market changed and Stelco began to make money. It no longer had a cash crisis — the platform had stopped burning.
But the fundamental issues that drove the company into bankruptcy had not changed. The market change was simply a “stay of execution.” However, there were many stakeholders, with competing interests and cash in hand. With the changed market, the stakeholders had no incentive to compromise and make a deal and no deadline to focus their attention. As a result, there were protracted discussions. When mediation efforts failed, the mediator felt there was a deal to be had but the time was not right.
During this period, the most effective behaviours were: patience, proactive communication, responsiveness and honesty about the situation. With the crisis suspended while the market conditions were good, a more complex response that took into consideration a broad range of stakeholders was required.
Getting the message across: With no crisis to drive change, it was necessary to have a consistent response over a long period of time. Stakeholders needed to be convinced the reprieve was temporary, the markets would change again and corporate change was necessary for Stelco’s long-term viability and sustainability.
It was critical stakeholders could trust both the information and the process. Any breakdown in trust stalled discussions and eroded progress. Those in leadership had to demonstrate tenacity, consistency and proactive transparency to build and sustain relationships with various stakeholders and to, eventually, obtain their support. The communication and relationship-building included respectfully challenging beliefs that were not realistic to provide context for moving forward.
A sustainable business model and multiple stakeholders: Throughout the presentation, Stelco CEO Courtney Pratt referenced the challenges of juggling multiple stakeholder expectations and demands with a commitment to save the company and place it on sustainable footing.
This perspective informed the decision to enter into bankruptcy while Stelco was still in a cash position. What became apparent over the course of the presentation was the term “sustainable” evolved from the traditional definition of economic and market sustainability to one that encompassed meeting the various stakeholder needs and expectations of the company. This definition, while complex and challenging, is a more deep-rooted sustainability, supported by a broader base of stakeholders.
Providing hope: Often the hope provided in corporate situations can be characterized as cheerleading or wishful thinking. Pratt drew attention to the need to keep an open mind, listen, get inside others’ heads (what he coined as “moral imagination”), tell the truth and establish trust. His version of hope formulated a compelling vision by incorporating the needs and expectations of stakeholders. It stuck to this integrated view despite efforts by individual stakeholders to sway the direction. People did not change just because of a crisis — they needed a compelling reason and vision that spoke to them and allowed them to accept difficult decisions.
The old adage “never waste a crisis” speaks to the reliance leaders place on using crisis to drive change. Stelco and Pratt’s story began in a crisis situation but the real learning for organizations comes from what to do when a crisis wanes while the underlying need for change remains.
Karen Gorsline is SCNetwork’s lead commentator on strategic capability and leads HR Initiatives, focused on facilitation and tailored HR initiatives. She has taught HR planning, held senior roles in strategy and policy, managed a large decentralized HR function and directed a small business. She can be reached at [email protected].
Would you like to attend one of the upcoming Breakfast Series in Toronto? Here’s a look at the next session:
January: Paul Bates talks about his new book What I’ve Learned So Far… And How it Can Help You: Clues for Succeeding in Crisis from 50 Graduates of the “School of Hard Knocks” (Jan. 19).
Visit www.scnetwork.ca for more information.
