I’ve made no secret of my love of employee-owned businesses. If you want to find the best working conditions, the highest pay, the best employee benefits, and the most cohesive strategies, all else equal, you are going to find them working for a company that has no outside shareholders and is instead owned by the workers themselves. If you own part of a business and you see a co-worker stealing, you aren’t going to sit back and let it happen. After all, it is your money!
[mainbodyad]Some employee-owned businesses structure themselves on a profit-sharing arrangement, where you get a check based on some criteria that might involve years worked or overall pay. Others structure themselves through an employee stock ownership plan, where you accumulate shares that generate dividends during your time at the firm, and have to sell them when you quit or retire.
The big appeal of an employee-owned business is that the money that would have gone to shareholders and Wall Street instead goes to the workers themselves. A perfect example is PCL Construction Enterprises, the $4+ billion construction firm in Denver, Colorado. The firm has 2,200 employees, with the average salary coming in at around $94,500. That alone is impressive but it gets better: Many employees receive dividend checks larger than their salary.
Hostess Brands Could Have Avoided Bankruptcy After Management and The Teamsters Reached an Agreement But One Tiny Union Called the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union Refused to Join
I have followed Hostess Brands for most of my life – though back then, it was known as Interstate Bakeries and was based out of Kansas City. I still remember one of the regional products, Butter-Nut Bread, on the store shelves of the little locally-owned corner grocery in the farm town where I grew up. Going through the SEC filings, it was clear they were in trouble but I studied them to understand why they were a “bad” business and someone like Kraft was a “good” business; the former had terrible returns, horrible economics, and lousy results, while the latter minted money for everyone involved. By the time I was in college, the situation had grown so dire that it spiraled out of control, the stock lost more than 90% of its value, and then the inevitable bankruptcy filing followed.
The behavior of the union in the Hostess Bakery liquidation is a perfect case study of, “cutting off your nose to spite your face”.
What transpired was the longest bankruptcy in United States history. Interstate Bakeries took five years, between 2004 and 2009, to emerge from bankruptcy protection. It was an absolute nightmare. A private equity fund made an investment, becoming the new owner, but had no luck turning it around despite a string of new CEO’s. Then, a couple of hedge funds tried to save the business from liquidation by buying up the distressed debt and infusing massive amounts of money, both in the form of new equity and debt.
Things still weren’t going well, in part because the labor cost structure is far too high and because the various management teams made bad decision after bad decision, resulting in slower sales growth. To save Hostess Brands from liquidation, the new owners offered to give the employees:
- 25% ownership in the business
- Representation on the board of directors
- $100 million worth of company-issued debt that would be repaid in the future
In exchange, the workers had to:
- Take additional wage and pension cuts
The International Brotherhood of Teamsters, the biggest union, said yes. A smaller union, the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union, refused. It ordered its workers to strike and hurled the business off a cliff, taking all 18,500 workers down with them. Hostess Brands announced today that it will liquidate. Shipments will stop shortly, the plants are closing, and court protection has once again been sought.
Think about that. An almost unfathomable 18,500 workers just lost their job. That is 18,500 people who have to go home and don’t know where their next paycheck is originating or even when they will see it, all because a handful of selfish people who don’t understand basic strategy would rather destroy themselves in what is the equivalent of an economic murder-suicide than act like rational, grown adults. Not only that, but this hurts tens of thousands of small businesses that rely on Hostess products to generate sales, including gas stations and corner grocery stores, and the millions of customers who enjoy everything from Hostess cupcakes to Wonder Bread. My old hometown has a Wonder Bread store; those workers are out of a job now, too.
In essence, the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union argued that the disaster at Hostess Brands was the fault of management (they are largely correct, it was), and that they had already taken huge pay and benefit cuts (they are correct, they had). However, that doesn’t matter when you are trying to make rational decisions. All that matters is you look at the opportunity cost in front of you at the time and make the best decision you can.
There is a lesson here for how you manage your own life: Did you have to struggle to pay your own way through college because your parents were drug addicts? Fine. It doesn’t excuse you if your life sucks now. Pick yourself up and go back to school. At some point, it is no longer mommy and daddy’s fault. Did you lose everything because of a spouse who had a gambling problem? That’s terrible but once you’ve grieved, being angry and bitter isn’t going to make your life better. Move on and do the best you can with what you have. The same can be said in this situation. Former management was terrible. Obviously. That doesn’t matter. All you can do is look to the future and try to fix the situation.
The Teamsters Union Should Be Applauded, The Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union Should Be Excoriated
To be as blunt as possible, this tiny union decided that because it can’t get what it wants (which wasn’t economically feasible but they seem to live in a world of candy canes and gum drops), it was going to destroy itself. The course of action it took was incredibly, stupid, selfish, irrational, and self-defeating. Even worse, it took down everyone else around them. That’s exactly what this was; an economic murder-suicide and the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union has blood on its hands. You do not destroy your fellow workers’ lives because you are a petulant child. It is sociopathic to behave that way.
Had the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union looked to the much larger, and much wiser, International Brotherhood of Teamsters, Hostess would have become one of the largest partially-employee owned firms in the United States. However, the union accused the hedge fund managers who had risked hundreds of millions of dollars of their investor’s money to save the bakery from liquidation of just wanting to sell the company as quickly as they could for a profit. Of course they did! Yes! This structure would have allowed the unions to benefit from that because they would have owned 25% of the business. Had the unions wanted to own 100%, when the hedge funds were ready to sell, it would have been easy for them to find financing, giving that they already owned 1/4th of the equity, to buy out the remaining 3/4th.
The workers at Hostess Brands should have cast an eye toward PCL Construction Enterprises and said, “We want to end up like that”. Getting 25% of the business in a deal is one heck of a step toward that direction.
No matter how painful the deal was, no matter how big the salary or pension cuts, if I were leading the union, I would have taken it. Why? I always want an ownership stake. If the business is as good as the employees think it can be, ownership is what they should want. If it isn’t, then it should be liquidated, anyway. I would have angled our way in, used the 25% to secure our position as owners, and then spent years working to secure a full employee-buyout of the entire Hostess Brands bakery. That way, there would be no outside stockholders. Everyone from the janitor to the CEO would be an owner.
The Downfall of the Unions Is Caused By Intellectual Brain Drain
Peter Drucker warned us this was going to happen someday. In the 1970’s and 1980’s, unions experienced a significant “brain drain”. The smartest young strategists and intellects went to work in other fields, like science, health care, or for hedge funds, resulting in unions, as a whole, being made of people who had less cognitive ability than was the case back in the 1950’s and 1960’s, when the class valedictorian might have gone to work for the local Teamsters. In my grandfather’s generation, it was a point of pride to belong to a union. Very smart men went to work in skilled labor, and were proud of the things they manufactured or created. Today, that is the exception rather than the rule outside of specialty industries such as those who create jet engine parts. Drucker told us it was a disaster waiting to happen and that the inevitable result would be the collapse of wage earning power for labor, causing social unrest.
You see this in the Hostess Bakery liquidation. The biggest union, the Teamsters, are able to attract more intelligent negotiators who understand the process, but the smaller unions, like the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, are left with the intellectual also-rans of society, causing misery and pain to rain down on everyone around them because they can’t think about to second-and-third-order effects. If I were a Teamster union worker, livid would not begin to describe how I feel this morning. To see my people hurt by someone else’s stupidity would be intolerable. I would try to salvage the situation by going to the bankruptcy court and attempting to work out an employee buyout of some sort. It probably can’t be done at this point, but stranger things have happened.
[mainbodyad]This dearth of labor capital is bad for America. You cannot have the capitalist class hold all of the power, which is going to happen when the unions are led by fools who are more interested in making a point and maintaining their pride than they are getting the best results. Screw your pride. Take the ownership, lay off as many people as you need (but not one more) to save the business, and then work nonstop for several years to turn the ship around so that everyone wins. This nation needs a strong middle class. Otherwise, who is going to buy the products? Who is going to rent the buildings? Who is going to pay for the services? What reasonable person wants to live in a nation where half of us survive in gated communities with beautiful lawns and the others live behind windows with bars and struggle below poverty.
A word of advice to future union leaders: If you are dealing with a high-quality business, ownership is always the way to go. You want your people to profit from the boom times, and suffer through the bust times, so they make decisions that are best for the enterprise. That is responsible capitalism. If you just want to extract value, and aren’t willing to take on the risk and reward of the firm’s success, you are just as bad as the vultures who come in and try to break apart successful companies for a quick buck; the flip side of the Janus coin; parasites all.
Thousands of people just lost their job because the union leaders of the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union made a bad judgment call. It’s a tragedy. Who cares if you are right or justified. Results are what matters. The result? Six weeks before Christmas, a large number of families just lost their income and will now have to rely on government unemployment benefits.
Congratulations, taxpayer: You get to foot the bill.
