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Worker Representation in Bankruptcy

posted by Andrew Dawson

Thank you to the Credit Slips team and, in particular, Bob, for inviting me to guest blog.

The recent news about the Tennessee Volkswagen workers’ voting against UAW representation fits into some of my current research looking at worker representation in bankruptcy. Shutterstock_158578121Interestingly, VW itself favored the unionization effort and, despite the rejection, VW has stated its intention to continue to find ways to create something akin to a German works council, which provides a way to incorporate employee voice into corporate governance.

Would something like a works council also improve governance in bankruptcy?

Currently, to the extent workers have a voice in the reorganization process, it is through their unions, and we have seen labor unions be very vocal in several recent chapter 11 cases. The pilots union in American Airlines, for example, played an important role in exploring alternatives to American's proposed standalone reorganization plan and in selling those alternatives to other corporate stakeholders. As I explore in my current research, labor union participation in reorganizations can provide a benefit not only to workers but also to the bankruptcy process, as unions can provide valuable sources of firm-specific and industry-specific knowledge to other corporate stakeholders.

But with unionization at all-time lows, it makes you wonder if such a role could be better served by an employee committee. Currently, employee committees in Chapter 11 are generally thought of as a sort of class-action-like vehicle designed to help employees resolve legal claims against the bankrupt employer, e.g., pursuing employees’ severance claims, as was the focus of the Enron employee committee.

Perhaps employee committees could serve a broader purpose, though. Instead of serving as a litigation vehicle, they could serve a valuable information-sharing function that could help management improve reorganization strategies and help other stakeholders evaluate those plans. Undoubtedly, this would come at a cost, as an extra cook in the kitchen would increase professional fees and perhaps make negotiations more cumbersome. Possibly, these costs are one of the reasons employee committees are so rarely appointed. But if bankruptcy is to serve as an occasion to identify and address the causes of financial distress, the benefits of employee representation may well outweigh those costs.

Assembly Line image courtesy of Shutterstock.

Comments

My first experience with unions in chapter 11 was Eastern where they brought the airline down. I struggle to see how that improved governance.

I also was told by union financial advisors in the auto cases that their clients were living in a fantasy world in which they contended that Big 3 management had literally stolen and hidden all the money earned by the Big 3 over decades and a bankruptcy would enable them to track it down. I can't see how empowering that perspective would do anything to make the reorg process run better.

The role of the unions in AA was not intrinsically helpful. They too denied the reality of an unsustainable cost structure. What was helpful was USAir's desire to acquire AA and it skilfully exploited the unions' antipathy toward AA management into support for the merger. Now of course, post merger, we see new management saying they can achieve even greater cost cuts than projected in the DS. So I think the unions will find the enemy of their enemy is not their friend.

You make a good point, mt, as labor unions can obstruct the reorganization process. But that may not be bad for bankruptcy governance. The labor problems in Eastern, the automakers, and American may reflect management problems. That is, by opposing the reorganization, labor may be sending a valuable signal to other stakeholders about managerial problems.

I'm curious about the practicality of "workers councils" in the United States. I've seen assertions that something like this will end up in violation of US labor laws, which are written in terms of an adversarial independent union to company relationship.

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