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Labor’s Comeback: Labor’s Man on the Board

Interview with Duane Woerth
Northwest Airlines Director and First VP Air Line Pilots Association

Part I: Saving an Airline: Inside the Deal
A union labor representative tells the inside story behind the last-minute deal that saved Northwest from bankruptcy.

Part II: Unions in the Boardroom
As Smith learns, sharing the boardroom with labor leaders can make for some interesting situations...and for a heightened sense of mutual respect.

Part III: The Benefits to Labor
Labor gains a pipeline to top-level management.


Part I: Saving an Airline: Inside the Deal



SMITH: Tell me about the circumstances that led to the union concessions in ’93 at Northwest.

WOERTH : Actually we can go back a little bit earlier than that because we had a transition to the new ownership team. And we've gone through quite a transition. A previous Northwest had a reputation of having some of the worst labor management relationship in our industry. People used to call Northwest “Cobra Airlines” - they'd strike at anything. There were so many strikes in the 70’s, it was just actually incredible.

Then we had a leveraged buy out in 1989. We got a new ownership team. And then between the Gulf war and other problems in the industry suddenly the place was hemorrhaging money. We needed a debt restructuring. There was so much debt on this company that it was an extremely difficult proposition to pay all this debt, operate the airline, buy new airplanes, pay its employees. It was a near impossibility from the get go in a lot of people’s opinion.

SMITH: So it was the pits.

WOERTH: It was not a lot of fun. But finally, when time was running out, we had the framework of, of a deal but no signatures, a bankruptcy was imminent. That was no joke. On July 6, we were, we signed a, actually on the 5th when we got our agreement, at Dasburg's dining room table, the CEO at 3:00 in the morning, we were three hours from filing. It was real.

SMITH: What would, what would bankruptcy have meant? Would it have, would it have changed the union contracts? Would it, would it have really put a squeeze on labor?

WOERTH: I think there's no chance that that contract would have survived intact. There would have been major modifications to it.

SMITH: Was it hard for you to sell that to your members at that time?

WOERTH: What management recognized was that the normal pattern for concessionary bargaining is they can always say ‘this is your job. Everybody else is an investor. Manufacturers can sell to other people, banks can loan money to other people, but this is your company.’ So normally what happens in this type of bargaining, concessionary bargaining, employees normally pay and nobody else changes anything. The banks continue with their debts. They get all their payments. Preferred stock holders get all their dividends.

Nobody takes any hair cuts, other than employees. And the other trouble with that that we saw as union leaders is that normally also didn't fix a company. It was just enough given, that the company maybe survived but it never really recovered.

SMITH: So what did you do?

WOERTH: Our goal as I say, we wanted a, we called it the comprehensive solution, a universal solution. We said ‘we'll do our part but if we make everybody else contribute to this solution as well, including the current share holders, including the lenders, including the manufacturers and the suppliers, if everybody who has a stake in the survival of this airline contributes, there will be enough contribution that this airline will not only survive, but has a chance to really thrive.’ And the results are obvious. It has been thriving. It's because of that.

SMITH: Was it a good deal for labor, to give back $900 million to the company and get some ownership and some board seats?

WOERTH: It was a good deal for labor and I guess you, you have to say on results and the results speak for themselves. It was a hard bargaining. We contributed real money. You know $900 million of real wages and working conditions, and at the current stock values we got about one and a half billion dollars worth of stock back today. So if we looked around we said from, from a near disastrous situation in 93, a mere 4 years later we're in a very good position. We've hired a lot of pilots, we've hired a lot of employees, we're a better airline. We got job security, and frankly we got our money back through the stock.

SMITH: What were you demanding for your concessions and investment in the company?

WOERTH: We were demanding of course, the quid on our side, we wanted the stock of the company that we hoped would, some day, would have significant value. And that was over 30% of the company stock. We also wanted governance, which is why I'm here today for this interview. Board seats on the real board of directors, with the, on all the big committees, not token seats, real board seats with votes. And we also wanted to make sure the other contributors- the manufacturers, the other share holders, the banks, all contributed to the survival of this company, had to give something up as well, to make sure we had a platform on which, as a company, we could move forward, and not just hang on by its fingernails. And that's what happened.

SMITH: I'm interested though. The implication here is that once management is really into this bargaining situation with you all, on the concessions, your description is kind of you were in a lot of ways driving the terms. Is that right?

WOERTH: We started off, and this is really fair to say, I know management who is still around will not dispute it. In September of 92, the airline pilots association, after we did our own due diligence, our researchers said ‘ok this company needs help. You've asked for two and a half billion dollars worth of wage concessions from the employees for free. We think you only need $900 million of it. We think the pilots should contribute about a third of that’. If you look out through the deal that's where the deal came down, within a hundred, you know, million here or there. It was, that's where it came out.

SMITH: You said, you said the negotiations wound up at one point 3:00 in the morning in John Dasburg’s dining room?

WOERTH: Right, that's where we concluded the pilot deal, was at his dining room table at 3:00 in the morning.

SMITH: Let me just ask you. John Dasburg, in 1993, negotiating that deal with you, what was he like?

WOERTH: He was honest, first of all. His duty was to make sure it happened, but to get the best price for the current shareholders and everybody he represented. And we all, we all knew our roles. We had to get the best...

SMITH: I'm mean at, at a moment like that is he, is he pushing things hard or is he highly collaborative?

WOERTH: Well at that point he had become the focal point on the management side. It was all kind of focused on that. He had to do all the big deals. He had to do it with ALPA, he had to do it with the machinists. I mean we have vice presidents of labor relations. You have a lot of people involved in this process. But now we are at the end game, and everybody knew the real deal on each case was going to be with a hand shake with him and him only. It wasn't a deal until you made a deal with John. So there was a lot of pressure there, and opportunity for him…

SMITH: And what's he, what's he like? Go back to 93, put yourself in the weeks leading up to that meeting at 3:00 in the morning in his dining room.

WOERTH: He was able to keep a sense of humor about it, even in the darkest hour. He was too stubborn to give up. I think where this company could have failed earlier, was if John Dasburg or Cecci or Wilson who could have thrown in the towel, and they certainly considered it. (He was) too proud and stubborn to give up. A lot of people who'd been in the airline business longer than they had, maybe would have given up. They didn't know how tough this was going to be and weren't smart enough to give up.

SMITH: You have a pretty fair respect for John Dasburg.


Part II: Unions in the Boardroom

SMITH: Why were the board seats so important to you?

WOERTH: The board seats ... if we were ever going to influence management in the future for our destinies, we needed to be in the only place that counts in corporate America, and that’s in the board room.

We wanted to make sure that being able to participate and have governance; and be able to direct and help direct, not run the company; to make sure that strategic decisions that are made are made not just for short term share holder interests or to get over one hump; that we think an enterprise like an airline really needs people who represent the working laborers of the company. And make sure that they understand, the laborers believe that they have a, not only a voice at the board, but management has a reason, as they would listen to a major share holder with 30% of the stock, the largest share holder, that share holder goes to the board of directors, he has to be listened to for very different reasons. We wanted to combine traditional union power with the power of that much stock and I think we did that.

SMITH: Here you are going in to the boardroom for the very first time. They, the owners, have invited you, the wolf, into the tent. How do you think they felt about that?

WOERTH: They weren’t anxious to see me that first meeting. You have to remember this was a private company, so the board members were all giant shareholders and, everybody. Dasburg wasn't a shareholder, he was the CEO. But all the others, this was a private company. Everybody in this board, including KLM representatives, these all had put in whatever money they had, but they were all big shareholders. And out of our negotiations, the unions had extracted 30% of their company. And they did not like that at all. And that was, you could sense that, a dead person could sense that walking in that room. It was cold. I had taken money out of their pockets, out of children's' trust funds, wherever they thought it came from. That was palatable. You could taste it.

SMITH: This is a big change in peoples' mind-sets, as well as the situation. What's it feel like?

WOERTH: Right well it, it was big but I was, I was more concerned about being, what was in front of us and the, the moment. I was really concerned that we, we had a chance to save Northwest but it wasn't saved yet. So at the very beginning I was really, really concentrated on that.

On the other hand I was trying to, I knew I was in a potential, had to be very careful with a conflict situation. There was a lot of controversy over ‘should union leaders serve on boards of directors? Do you have a conflict of interest.? Can you really represent all the shareholders, as your fiduciary duty requires under the law and still represent your union members' constituents? Isn't there a conflict here?’ So I was extremely, if there's anything on my mind was making sure I could ride that fine line and, and be, have my integrity intact when this process was all over.

And then, but the most interesting thing probably was that to immediately serve on the stock and compensation committee, which has been a major headache in a lot of ways.

But suddenly I, I find executives understand the power that stock and compensation committees recommendations on their, their compensation. So I'm negotiating my compensation with John Dasburg and I'm also negotiating his compensation with me. That was an interesting dynamic.

SMITH: How does that work?

WOERTH: Well it works only after a lot of, it took just as much negotiation to get his deal as it did to get our deal, let's put it that way.

SMITH: And he's pushing for more options than...

WOERTH: We all want it. That's just, that's the way the capitalist system works. CEOs get a lot of money and they all look at each other's compensation, whether it be salary or stock options. It's the way they keep score.

SMITH: Tell me about your relations with John Dasburg. How often do you all talk?

WOERTH: Well John Dasburg and I probably talk at least 4 times a week. Sometimes we'll talk three times a day. So I, I'm a very involved director and not just because of the labor relations piece or the stock and compensation piece, but I'm very involved with this company. And he seeks my advice and counsel frequently as...

SMITH: On what kinds of issues?

WOERTH: On any kind of issue from ‘what are, what, what do you think is going to happen with the Japanese negotiations and trade and our bilateral? What's going to happen in industry, what's going to happen with these tax bills on airline fuel taxes?’ You name the issue or what's going on with our company. ‘How come we can't make Detroit work and what are your views on 747 400 purchases?’ and ‘how can we get a better price out of…?’ Well you can't think of a subject that we probably don't discuss.

SMITH: What’s the flavor, the climate, of your talks with John Dasburg? He’s the boss.

WOERTH: He’s the boss but he can’t fire me. Maybe that’s made us have a good relationship. I’m a union member. I’m a board member. And he can’t do a damn thing about it. And that’s been very healthy for our relationship. A lot of times what we have to do is kind of establish the subject matter and what hat we're both wearing. And a lot of times it will be ‘John I'm speaking to you as a union representative. You can forget your board seat. I'm talking to you as a union position’. Or he's talks to me: ‘I, I'm not your CEO. I'm just another director now and we've got to get something straight and this is extremely confidential and, and you can't share it with anybody’. So we get it really straight on which hat each of us is wearing.

But we're comfortable with that. We've been doing it a long time and it's very easy and there's no, since we trust each other and if I, I disagree I'll just tell him. And I know if he thinks I'm out of my mind with my idea, he'll just tell me point blank and, but, and there's no recrimination. There's nothing left behind.

SMITH: A mutual relationship on both sides.

WOERTH: Absolutely. That’s how I view it..

SMITH: So what are your relationships with other managers throughout the company? I mean do you hear from them, do you talk to them? What happens?

WOERTH: Well, very frequently. And what I, my relation, it starts with my relationship with Dasburg. And I said I need to, to be able to do my job as a director, I need to have enough information to do my duties. And they, and you put out an interesting dynamic. They know I'm on the stock and compensation committee, so believe me if I have a phone call in to anybody in that company, it's immediately returned. And it must just be a coincidence but it just seems to happen that way. But John's encouraged it. Cause he wants, if I got, if I'm on to something he wants me to find out what it is and get it fixed. Cause ultimately he's going to be ultimately accountable. If something's wrong and I can get to the bottom of it quickly and help find a solution, he'll get the credit. And if I don't, he'll end up with the blame. So he's encouraged people to be very open with his, their labor directors.

SMITH: And what about, I mean, somebody's got something wrong, do people take the initiative and call you?

WOERTH: That's another interesting thing. It's interesting you point that out. There are some times when different managers have raised issues and are getting shot down in the finance committee. They can't quite get funding but they really still believe in this project. It's not getting any attention. I'll get this interesting phone call or memo in the mail and they want my attention and so I can bring it up at the higher level, at the board level and put some other weight behind it. So they use me as well.

SMITH: What does John Dasburg say to you about, about all the contacts you’ve got around the company?

WOERTH: He tells me that I’ve got spies on every floor in his headquarters, and he knows it. His assumption is there are no secrets that can be possible in this company. Between all my previous history with both management and labor, and he knows everybody talks to me. What they, but they have their agenda. They want me to get something out of him. He knows that. He just accepts it as a fact. So and that is actually beneficial. So he doesn't try to hide anything from me cause I'm going to find it out anyway.

Part III: The Benefits to Labor

SMITH: Can you give me some specific examples of the advantages for the union of having you on the board?

WOERTH: The union - there are times when a union absolutely has to know, no baloney, what the bottom line answer is; what a management decision is going to do and what its consequences are going to be. The consequences can be so much, they just can take no risk of knowing the absolute no kidding truth. And when you’re on a board of directors you can get that.

And I just feel very strongly that it's only an additional tool and when I use the golf analogy it's like now by having a board seat, you've got your titanium Big Bertha. You can do things with that, that you know you have access to things you couldn't do before. But it didn't replace, you can't play with Big Bertha for the whole round. You need all your other union tools which are even more important. A board seat allows you additional access, additional information, different ability to influence management. But every other segment of the union is just as important as it ever was.

SMITH: Are there concrete advantages to your union members that you can point to as a result of your board seat?

WOERTH: I think, probably, I'll start with the first example of holding management accountable. I think that's one of the principle responsibilities of a board member and what any board tends to do, they're all part time. They only come into town 4, 5 days a year. They're all normally very successful businessmen, very busy. They don't have enough time that they're not inside to find out what are the problems in the company.

They don't get to talk to the grass root line workers and find out what's wrong. We talked about empowerment, and the employees are trying to contribute. But without this kind of vehicle, it's hard to get that voice up into the highest echelons of the company and make something happen. That's the principle advantage.

We've been able to solve problems faster, because of the filter of multiple levels of management who don't want all of these problems to actually surface. They like them to be solved, but not to be held accountable for the failures previously. That's just part of business. But the principle advantage, and there's lots of examples where these problems get surfaced early, and a decision is forced because it's illuminated, the board knows there's a problem. There’s evidence of the problem, and the hold management, starting with the CEO, accountable to get that problem fixed.

SMITH: KLM evidently at one point wanted to sell back its share of the stock and you, you intervened in that or you set a condition on that. Talk to me about that episode. What happened?

WOERTH: Well initially when we were negotiating with KLM to buy back their stock which we eventually did for basically a billion dollars for a nice round number. I was approached with John Dasburg and by Gary Wilson, the chairman of the board, they wanted to make sure what was it going to make this comfortable that we can do it. And that our employees won't be upset. And, and I said ‘well first of all you have to make sure, we're not going to cancel any airplane orders. If you tell them we have enough money to buy back KLM stock, you can't tell them we don't have enough b, money to buy our future aircraft or our jobs. So you make sure that airbus order is done and complete’.

‘Also our pensions have been historically underfunded which is a thing within business, the way it's recorded. But as a, we want to see that continue to be improved and in fact let's continue to fund them. Not only fund them but to give them the maximum amount allowable under law and make sure those things get up to 100% funding as fast as possible. And you're not going to have my support for this deal until those conditions are met.’

SMITH: And did they meet them?

WOERTH: Yes they did.

SMITH: And I mean within a reasonable period of time?

WOERTH: Well the pension funding was already underway. We just had to make sure it was completed. And then they understood completely the necessity. We were negotiating with airbus and they completed the deal. But most importantly they announced the deal, didn't try to hold it hostage, which is a very common practice in our industry. We're not going to buy you any more airplanes unless you give us concessions. Or you, we're in the middle of a negotiation. I think they should be given credit for just forthrightly ordering the airplanes, announcing the deal and moving on. There's a lot of needs for capital in an airline, and to be able to do that, and be good for the share holders, and make sure the employees had a future and a job that's secure, was a balance that had to be struck. And employees, you have to maintain the faith. If you're going to have employee ownership and run a customer service business, employees have to believe nobody's around here just trying to cash in their chips six months from now, that they're investing in their lives and their retirement plans for the future. And, and we made sure that happened.

SMITH: That's interesting. You're 30% owners roughly, right?

WOERTH: Roughly, that's correct.

SMITH: Technically speaking, Dasburg and Wilson, the CEO and the chairman of the board, could go to non-union directors on the board and outvote you. Couldn't they, technically?

WOERTH: That's a technical possibility but I tell you what. We have probably only had maybe one vote that by the time it was all done at the board level, probably didn't end up unanimous. There's been a couple. But usually if they're serious, if you can get one or two other guys to object, that deal doesn't happen. The deal is modified and changed until they can get a much higher percentage. They don't like to roll not just labor directors, they don't like to roll other constituents on that board, major share holders who have a problem that the deal has to get changed to make it be accommodated.

SMITH: Can you give me an example of something that came up, got blocked by you all and the deal then got changed and brought back in a more acceptable form?

WOERTH: I wouldn't, you can call it a block. But we, we didn't like the, the regional jet proposal. They had, they had a proposal to start a new airline. They were going to buy an airline that nobody had ever heard of, a small company in the west someplace. And use their pilots and use their airplanes to begin a new regional jet service. And after a lot of discussion, they said ‘that's unacceptable, it's the wrong airline, it's the wrong airplane, it's the wrong circumstance’ and they changed their mind. That proposal died.

It was an airline that's no longer exists. I don't even remember the name of it, and it had non- union pilots, and we were going to have to have all kinds of heartache over that, and that was just simply unacceptable, so it didn't happen.

SMITH: That's interesting. Now were there other directors that sided with you all on this? Or was this pretty much the three union representatives sticking together?

WOERTH: No, there were other directors. In fact a lot of us, when they listened to the arguments- cause it wasn't just the, the non-union pilots. There was the, the experience of the airline, the financial history, our, our risk of buying them, the other debt loads they had. There were financial reasons not to do this besides the lack of union pilots. And when we put that all together, the rest of the board was uncomfortable and that's why that deal disappeared.

SMITH: But you were the first to raise the objections.

WOERTH: That’s correct. We were the ones raising the red flag first. And I think the more open negotiations are, they’re still tough negotiations. This is the hard nosed bargaining. But the fact that each of the major unions has seats on the board of directors, one of the things that can make it easier is that we don't waste a lot of time with believing the other side doesn't know everything.

Getting back to your spies thing. When you're on the board and you have access to all the data, there's no way to call anything other than it is on a financial basis. In other words how much money we make, how are we compared to the competition. We can argue about what we want to do with the facts. But we no longer argue about what the facts are. That's probably the principle difference.

SMITH: And what about, I mean, there's also, you suggested previously that in terms of the fleet plan and buying more aircraft, there's no way management can play games with, you know, the, the little ball underneath the three cups. I mean in other words there's a certain amount of management bargaining leverage that's been taken away by the open books. Is that right?

WOERTH: Yes, I, I would agree with that.

SMITH: Why do you think John Dasburg wanted to put you guys on the board for another five or ten years?

WOERTH: What you're really asking I believe, is what was their expectation. I don't think they had any expectation that they were going to like anything to do with labor representatives on the board piece. I'm not sure if they thought they could trust us. That we wouldn't always just be bringing in informational picket signs or use, that they could really trust us to maintain confidentiality. I think they had grave concerns how this was going to work and were surprised, frankly, by how well it did work, and once they did that, as you would expect them to do, they tried to capitalize on it and make even more money from it.

SMITH: What do you see in their attitudes? When you took money out of their kids' trust funds. You're the enemy but circumstances have forced them to take the wolf into the tent right.

WOERTH: Exactly right.

SMITH: Ok. So now here we are 4 years later. what's happened to those guys? What kind of change have you seen in the mindset of management of John Dasburg from 93 to today?

WOERTH: At the very beginning this was something that was forced upon him against his will. And now he’s learned to accept that its actually working for him so he learned to like it. I would see the evolution in John Dasburg and the rest of the board members as being very reluctant and skeptical. But these guys, you have to remember that these type of men and women are so results-oriented, they almost can't focus on anything else. If they're, if it's producing results, they want more of it. If it's not producing results, they want less of it. They have had good results. So they, against all their inclinations, they want more of it. At least the amount they have now. That's about as simple as I can make it. These guys are so results oriented, they saw their shareholder value, the way they value everything in this business.

SMITH: So if they’re making money-?

WOERTH: More of it.

SMITH: Tell me, how do your union members react to you now, I mean has the relationship to the company changed now that you’re on the board and they’re owners?

WOERTH: It's the toughest job I've ever had. It has maybe the most rewards; I can have some impact. You can see it felt easier, in my position. But in terms of criticism, I don't think I've ever absorbed one tenth of the criticism in any of my other union positions as it has from my board seat.

SMITH: What do they say to you?

WOERTH: And the reason is that, they want me to pay executives less, buy more air, they expect results. I guess it's a matter of the expectations. They think if I'm on the board I can produce a lot more results than I really can and that's...

SMITH: What do they say to you, what do they say to you? ‘Duane god darn it…?’

WOERTH: ‘How come we're not buying 20 more 747s? How come we, you know, why aren't we doing this, why aren't we doing that? Why didn't we buy this?’ I mean it's usually about why aren't we spending money.

SMITH: How has this employee ownership paid off for the workers themselves?

WOERTH: Well again there, I guess pilots in particular, are kind of results oriented too. So they're feeling good, they always want more. That's why we, that's why we have a lot in common with management sometimes. Pilots and management always want more. And but what they're concerned about is always the future. They're mostly concerned, and what their principle complaint to me, impression to me, is get, make sure the share holders continue to invest in the company.

In other words, that's why I referred earlier to the KLM issue as versus buying airplanes. ‘Make sure we replace the fleet in Japan.’ You know, ‘let's make sure we have a renewed fleet plan for the Pacific. How are we going to, how are we going to compete with these other alliances of United and you know the Star Alliance and what happens at BA American? What are you doing to make sure this airline is competitive?’ That's the kind of questions I get from my members.

SMITH: Do you ever find, do you ever find yourself thinking ‘I'm thinking like a manager, I'm thinking like an executive?’

WOERTH: Oh sure, in fact one of the things I have to be very conscious about, ok I, I'm acting as a board member. I have a duty well I, as acting as a board member. Then I also say...

SMITH: What does that mean? I mean I said something, I want to get - So you have the duty as a board member. What does that mean to you in terms of your mind set and the way you're thinking?

WOERTH: So I have to, to bring in the, the compromise position. Where is the best interest of my membership for the long term going to be placed? And that's a difficult question sometimes. Especially it's a difficult question if I have access to more information than I'm allowed to share with the rest of my members. I’m making decisions sometimes knowing there's nobody else in this union who knows this but me.

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