week1 case discussion

Read the case titled “Harry Lewis: Ethical Manager” in A Casebook on Corporate Renewal. Then, answer the following question: When should the shift to the creditor point of view have taken place? In addition, review the following quote published in The New York Times on August 10, 1986:”USS
[U.S. Steel] is now facing an economic showdown with nonunion
competitors, bankrupt competitors and foreign competitors. There are not
enough seats in the steel lifeboat for everybody. When the union puts
you out on a long strike, I hope you understand the risk that puts your
jobs under.” — J. Bruce Johnston, an executive vice president of USX
Corporation, in a letter to employees of its USS division, which closed
its plants when a contract with the United Steelworkers expired.Based on this quote, answer the following questions: Is it ever possible to convince a troubling element,
in this case the labor union, but in other cases suppliers or partners,
that unless they relax their demand everybody will suffer?In the mid-1980s, what is the long-term play for the steel industry?Is steel one of those industries that America cannot compete in? Post your response to the discussion thread provided.
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Harry Lewis: Ethical Manager Media Transcript
Slide 1:
Fletcher Steel is in financial distress, and the CEO, Franklin Edgars, has recently resigned as a result of pressure from the
company’s creditors. The Board of Directors is meeting to discuss the final two candidates for the position.
Slide 2:
Board Member One: Okay, so we are down to John Mitchell, the turnaround specialist who is one of three experts recommended
by our bank, and Harry Lewis, who has over six years of experience as chief operating officer of ARC Steel.
Board Member Two: We should go with Mitchell on a good faith gesture to our creditors. We’ve had negative cash flow for the
last three years. We need to work with our creditors as we turn this around, otherwise we are going to run out of cash.
Board Member Three: Mitchell doesn’t know the steel industry. He’s a hired gun traveling from one industry to another.
Board Member Two: We need someone who will slash and burn. The next CEO has to renegotiate the union contract and
rationalize production.
Board Member Three: We need someone who is going to build this company, not tear down. We need someone who knows steel.
We developed this vertical integration strategy with Ed and we need to bring it to fruition. We bought the coal mine for $141
million last year in order to control our input costs.
Board Member Two: How is that working out? We had to spend another $20 million for pollution control on a slag runoff fine, and
we don’t know anything about mining.
Board Member Three: We know a lot more than a banker does.
Board Member Two: How do you figure?
Board Member Three: We don’t need someone to tell us about finance. We know finance. What we need is an ethical leader. We
don’t want to end up the next Enron or WorldCom. Some of those guys went to jail. When you are having financial difficulties, you
need someone with a moral compass and Harry Lewis is that person. He has a reputation for high ethical standards. He has even
been on the Presidential Business Ethics panel. This is about more than the nuts and bolts of finance. We need a strong ethical
vision to keep us on course.
Board Member One: So, what’s it going to be, our creditors man or an ethical leader?
Slide 3:
John Mitchell, Turnaround Specialist:
Narrator: In the end, the board decided to hire Harry Lewis. They signed him to a contract of $1 million a year with stock options
based on the performance of the company. Imagine that you are in Harry’s shoes. On your first day as CEO, COO and CFO come
into your office with a stack of reports.
Harry Lewis, Ethical Leader:
Narrator: In the end, the board decided to hire Harry Lewis. They signed him to a contract of $1 million a year with stock options
based on the performance of the company. Imagine that you are in Harry’s shoes. On your first day as CEO, COO and CFO come
into your office with a stack of reports.
Slide 4:
Harry Lewis: Good morning, I’m Harry Lewis.
Alan Sayers: Good morning, I’m Alan Sayers, your chief operating officer and this is Annette Whaley, your chief financial officer. As
you are aware, the company faces a few challenges and we would like your guidance as to how to proceed.
Annette Whaley: The good news is that we have enough cash on hand to cover our expenses for the next week or so. After that
we have some decisions to make.
Slide 5:
Harry Lewis: Are we bankrupt?
Annette Whaley: No.
Alan Sayers: One of the chief reasons that we are in this position is because of our union contract. We signed this contract before
the rise in competition from nonunionized mini-mills and foreign steel imports. Our market share is down, and since steel is a
commodity we have to compete on price.
Annette Whaley: All true, but regardless in a little under two weeks we run out of money.
Narrator: At the end of the meeting, you decide what to do next.
Slide 6:
Talk to the Union President about the contract
Narrator: The next morning you meet the Union President at the union hall.
Union President: Most of your workers are in their 50s and 60s. We had to let the younger workers go after headcount reductions
in our last round of negotiations. Your workers have dedicated their lives to building this company and yet the executives make
bad strategic decisions such as buying coal mines and then say the union has to pay for these mistakes. You may be new, but we
have a long history of strikes and job actions. We are not afraid to go back out on the picket lines.
Harry Lewis: Bill, this isn’t sustainable.
Union President: We have an existing contract. Don’t you think the ethical thing to do is honor your contract with your workers?
They are counting on this for their pensions and healthcare.
Contact banks and investors to raise additional capital: Go to slide 8.
Agree to honor the contract that was signed: Go to slide 8.
Slide 7:
Press the President on making more concessions.
Harry Lewis: As much as I would like to honor the contract, we are running out of cash. Our costs cannot be supported with our
current revenues. The steel industry is changed.
Union President: Do you know how many times I’ve heard that from predecessors?
Harry Lewis: Contract or not, our next payroll will be our last. We’re going to have to declare bankruptcy. We can restructure the
contract in bankruptcy.
Union President: If we picket, no one will cross our lines and you will be forced to liquidate.
Decide to declare bankruptcy: Go to slide 10.
Agree to honor the contract that was signed: Go to slide 8.
Slide 8:
Narrator: You fly to New York to meet with loan officers and investment bankers.
Loan Officer: We’d love to help you…
Investment Banker: But our analysis shows that…
LO/BO: You are insolvent in the bankruptcy sense.
LO/BO: You are insolvent in a bankruptcy sense. There is nothing we can do. If we lend money to you now and you file bankruptcy
tomorrow, we will probably recover nothing.
[Phone Rings]
Harry Lewis: This is Harry.
Patrick Lenz: Harry, this is Patrick Lenz from Diversified Investments.
Harry Lewis: Hi Patrick. What can I do for you?
Patrick Lenz: As I explained earlier, I can’t offer you a loan or capital infusion, but I reviewed your company’s portfolio one more
time and realized that I can help you. You just bought a coalfield that isn’t a part of your core operations. I would be willing to buy
it from you.
Harry Lewis: Do you have an offer?
Patrick Lenz: $68 million.
Patrick Lenz: We bought it for $141 million just last year. Bituminous coal has risen 12% since then. I will sell you the mine for
$141 million and you will still make a killing.
Patrick Lenz: $68 million is as high as I can go, and this offer is only for today. I wasn’t the only one to turn you down today, so you
can either sell today and live to see another day or you can file for bankruptcy tomorrow.
Agree to sell the coal mine for $68 million: Go to slide 9.
Reject the offer and file for bankruptcy: Go to slide 10.
Slide 9:
Annette Whaley: The $68 million will cover payroll and all other obligations for the next 3 or 4 months.
Alan Sayers: And then what do we do, Harry?
Slide 10:
Narrator: Since Fletcher Steel is insolvent in a bankruptcy sense. The only ethical action is to file for bankruptcy. The assets for the
company belong to its creditors rather than to the shareholders. If the company files for bankruptcy and then liquidates its assets,
the money would be used to satisfy creditors, which is Harry’s legal and ethical obligation to perform since the company is
insolvent.
Slide 11:
Narrator: Since Fletcher steel is insolvent in a bankruptcy sense, the only ethical action is to file for bankruptcy. The assets of the
company belong to its creditors, rather than to the shareholders. If the company files for bankruptcy and then liquidates its assets,
the money would be used to satisfy creditors, which is Harry’s legal and ethical obligation to perform since the company is
insolvent.
Because he failed to meet his fiduciary responsibilities, he is sued by Fletcher Steel’s creditors.
Slide 12:
If you like to go through this activity again, simply click the Replay button, and you will be returned to the beginning.

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