Thursday, 14 February 2013

The Complicated Labour Legacy of Jimmy Hoffa

It’s Valentine’s Day and though couples everywhere will be gazing adoringly into each other’s eyes, we know there’s only one thing people really have on their minds: Jimmy Hoffa.

Hoffa had a strong and polarizing personality – some love him and some hate him. Whether one is firmly on the side that believes Hoffa did a great disservice to the Labour Movement or in the camp convinced of his enduring value to the Labour Movement, the undisputable fact is that Hoffa had a profound impact on the history and direction of organized labour, both in the US and elsewhere.

On this day in 1913, James R. Hoffa was born in Brazil, Indiana. Hoffa was only seven years-old when he lost his father to a lung disease caused by poor working conditions in the coal mines. After his father’s death, Hoffa’s mother moved the family to Detroit, Michigan. It was here that Hoffa began his union activities.

When he was seventeen years-old, Hoffa worked at Kroger Grocery and Baking Company where he unloaded shipments of produce. His wage was 32 cents an hour. The job had a couple of major downsides: (i) the workers worked 12-hour shifts but were only paid during the times when they were actually unloading. Much of the job was waiting for another shipment to come in and the workers were unpaid during this time. (ii) A harsh foreman who liked to abuse his power and who seemed to enjoy both firing and threatening to fire workers[1].

In 1931, the foreman’s penchant for abusing his power was on display in full force when he fired two workers for going to a food cart for their dinner. For Hoffa and the other workers, this was the last abuse they could bear. Together with some of the other workers, Hoffa organized a work stoppage just when a delivery of fresh fruit arrived. Fearful that the fruit would spoil if the strike persisted, management quickly gave in and agreed to meet and negotiate with Hoffa and the other leaders of the strike the next day.

The subsequent meetings with management showed Hoffa to be a skilled negotiator. He successfully negotiated a wage increase of 13 cents per hour for the workers and obtained a guarantee from management that the workers would receive at least half a day’s pay. Most importantly, management agreed to recognize the union[2].

Emboldened by this success Hoffa went on to incorporate Kroger’s workers into a local of the union he would one day head – the International Brotherhood of Teamsters (IBT). He became an organizer for the IBT and, at only 28 years-old, Hoffa was elected vice president of the union. Later, in 1957, he officially became president of the IBT[3]. 

During his tenure as president of the IBT much was made of Hoffa’s association with known mafia members. Hoffa didn’t try to hide these connections and often used his mafia association to intimidate and to prevent interference with the rights of IBT members[4]. Unfortunately for Hoffa, Robert F. Kennedy Jr., then Chief Investigator of the Rackets Committee for the United States Senate was cracking down on organized crime[5]. Hoffa was suspected of misappropriating union pension funds, among other things, and was the subject of several federal investigations. Charged with violating a provision of the notoriously anti-labour, Labour Management Relations Act (also known as the Taft-Hartley Act), Hoffa went to trial in 1962. The trial concluded with a hung jury.

This didn’t end Hoffa’s legal woes, however. In 1964 he was convicted of bribing jury members during the 1962 trial[6] and, in 1967, he began serving a 13-year prison sentence[7]. He was released in 1971 when President Nixon commuted his sentence[8].Four years later, in 1975, Hoffa disappeared. He was declared legally dead in 1982[9].

Hoffa was a complicated man who left an equally complicated legacy. Opinion will likely always be split over whether his involvement with the labour movement was beneficial or detrimental. He was certainly a big personality. If nothing else, Hoffa made the Teamsters a household name and brought labour issues to the attention of the general public in way that hasn’t been seen since.

Monday, 11 February 2013

Hostess Redux

When Hostess entered a federal bankruptcy court in the summer of 2012, there was near hysteria among some that this was the death of Twinkies and other famed snacks. It wasn’t long before Twinkies were listed on eBay, often with an asking price at a significant premium to their retail price[1].  Clearly, Hostess products still had a strong market. Hostess had the kind of consumer base most businesses dream of. So what happened? People wanted to know who was to blame for the demise of such iconic treats as Twinkies and Ding Dongs? Fingers started to fly.

The two main unions involved with Hostess were the Teamsters Union and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (bakers’ union). One common place for the fingers to land has been squarely on them. Some commentators likened the death of Hostess to a calculated contract “hit” by the unions[2]. Others blamed “parasitic” unions for killing the company[3]. 

Hostess has been around in one form or another since the 1920’s. With any company as large and as storied as Hostess there will almost always be more than a single cause for its demise, and that is certainly the case here. Despite the lopsided presentation of union complicity in the woes of Hostess, if one were to identify a single cause, only those who approach the situation with an anti-union bias could possibly conclude the unions were that cause.

Though the company had a bevy of loyal customers, CNN reports that Hostess sales began to decline in the 1980s and 1990s as more health-conscious consumers forsook snack cakes and other Hostess products, like Wonderbread.

By 2004 the company was nearly a half-billion dollars in debt and filed for bankruptcy. To keep the company afloat, the unions made large concessions, taking wage reductions anywhere from 28-32%, giving up thousands of jobs and millions in benefits. Aided by these concessions the company was successfully reorganized after five years. When Hostess re-emerged in 2009, it did so infused with fresh capital from Ripplewood Holdings, a private equity firm and Silver Point and Monarch, each hedge fund lenders.

Silver Point and Monarch typically invest in distressed companies[4]. Some say they exemplify vulture capitalism of the sort President Obama was so critical of when he discussed Mitt Romney’s record at Bain Capital. The basic strategy of these hedge funds is to invest in companies that are essentially good companies but which have negative capital structures. Capital structure refers to the manner in which a company finances its assets, through debt or equity, for example. The types of capital structure that would be attractive to Silver Point and Monarch are made so by corporate stresses like bankruptcy. Such liabilities of an otherwise good company allow for it to be bought at a steep discount.

Allowing Hostess to emerge from bankruptcy in 2009, the lenders forgave half of the company’s debt, provided a new secured loan of $360 million and converted the other $225 million of debt into payment-in-kind loans, a type of financing often used when a company has an above-average risk of default. Ripplewood had already invested $130 million. Ripplewood’s investment, plus the money from the lenders, meant Hostess came out of reorganization with $490 million. The company also had weaker unions due to the concessions unions made to keep the company alive.

This was supposed to turn Hostess’ fortunes around. It didn’t. Hostess may have come out of Chapter 11 reorganization in 2009 with $490 million, but it did not come out free from debt. Hostess had $670 million in debt in 2009 and the lenders were charging fairly high interest rates on the loans to the company. When early 2012 rolled around, Hostess’ debt had climbed to over $800 million, largely due to interest owing on loans. Sales had also been declining and the Global recession had increased Hostess’ operating costs by forcing up the price of many of the staples Hostess relied on to make its products[5].

The lenders infused Hostess with more money, but also went to the unions in search of more concessions. The unions, however, still weary from the first round of concessions, denied any requests for further concessions. In January, 2012, Hostess filed for Chapter 11 protection again.

In August of 2011, in breach of existing collective agreements, Hostess began diverting union pension contributions in order to fund operations[6]. So stellar was the Hostess management that Hostess does not know how much it diverted from the pensions[7].  The company taking pension funds in breach of collective agreements was not enough. The lenders wanted more concessions from the unions. Without such concessions, the hedge fund lenders made clear they would withdraw their support from Hostess.

In the interests of saving jobs the Teamsters agreed to take reductions in pay and benefits. The bakers’ union took a different tack. The bakers’ union refused to give more concessions and went on strike. The hedge funds withdrew their support and Hostess sank[8]. And as Hostess sank the chorus of voices blaming the unions rose.

There has always been consumer demand for Hostess products, albeit a waning demand. For the company to reach the point of liquidation has little, if anything, to do with the unions. Anti-union voices have loudly blamed unions for the demise of Hostess, however, arguing that if only the unions would not have been so stubborn, Hostess would still be in full operation. If the union workers are out of work, the line goes, it’s because they chose to be.  This is sleight of hand. It shifts the blame from the Hostess management which failed to adapt to changing market conditions and which couldn’t effectively manage a company with many beloved products and places the blame squarely on the workers who makes those products.

Besides ignoring the fact that the company squandered the union concessions and raided the workers’ pensions, calling the unions “parasitic” also ignores the fact that the lenders sucked Hostess dry while simultaneously increasing the company’s debt and all but ensuring the company’s bankruptcy through exacting interest payments the company could not afford.

While going through liquidation last November, Hostess successfully requested $1.8 million in bonuses to be paid to 19 executives as an incentive for the executives to stay with Hostess and oversee the liquidation process[9]. Thousands of union members lost their jobs when Hostess liquidated, and the executives who couldn’t manage the company well enough to keep it out of the red, got bonuses in order to oversee the company’s liquidation. With this kind of management is it any wonder the bakers’ union opted to strike?