Harry Lewis: Ethical Manager Harry Lewis the new CEO of Fletcher Steel Inc. (FSI) was hired in December 2003 to replace Franklin Edgars who had been CEO for the prior 18 years. During Franklin's tenure FSI had gone from being a steady profit earner to a cash flow negative enterprise. FSI is a large unionized continuous-casting steel company established in 1916. Its mills are in the Midwestern United States with the bulk of its products serving large industrial concerns in the automobile, appliance, and road building industries. Franklin was a "good old boy" who had spent his lifetime in the steel industry. He accepted as facts beyond his control high industry-wide union wage settlements, the encroachment of mini-mills, and the threat of foreign steel imports. His nearly $1 million salary and a healthy benefits and bonus package assuaged any reservations that he may have had about these issues. Unfortunately, the creditors, of whom there were many, did not feel as sanguine about FSI's future. Starting at the end of the 3rd quarter 2003, tremendous pressures were exerted on FSI that resulted in Franklin Edgars being sacked. Creditors began their anti-Franklin campaign in January 2003 after nearly three years of negative cash flow. They were justifiably worried about the eventual repayment of their loans. As the 3rd quarter ended, FSI was in violation of several of the covenants restricting its various loans. This put FSI into technical default greatly increasing the leverage of its lenders. Lenders insisted that Mr. Edgars be replaced and that a hard-nosed turnaround manager be brought in as the Chief Restructuring Officer. The board resisted and comprised by hiring Harry Lewis to replace Franklin Edgars. Harry was not a novice to the steel industry having spent the past six years as chief operating officer of a small mini-mill steel operation. However, his background

with a company using a fundamentally different technology and located in the non-union South made him a peculiar choice for the position. What impressed the board of directors of FSI about Harry was his reputation for having high ethical standards. Not only had Harry been seen on the cover of a major business newsmagazine in regards to his ethics but he also had served on a presidential business-ethics panel. The lone dissenting voice on the board of directors asked whether a little less ethics and a little more business acumen might not be preferred. Other directors who felt that ethics were the most important attribute of a CEO following revelations about Enron and WorldCom carried the day in this debate.

FSI's immediate problem as the 1st quarter of 2004 was drawing to a close was making its payroll. Prior year's losses and a $141 million bad investment in a coalmine in Kentucky had nearly depleted the company's coffers. A $20 million pollution control and slag run-off fine had been imposed on the coal company shortly after the purchase was made. FSI had not expected those charges. Conversations between Harry and the CFO suggested that checks due during the next two weeks would not be a problem, but that following that there would probably not be sufficient funds to pay workers, suppliers, and assorted real-estate taxes due. Harry made the rounds to FSI's lenders, private equity investors, and to Wall Street seeking more funds but he got nowhere. The recent bankruptcies of Bethlehem and National steel had put these sources in the wrong mood. Each of them uttered the phrase, "insolvent in a bankruptcy sense" repeatedly to him. While Harry had been unsure about what the phrase meant when he started his meetings, he was an expert on them by the end.

He then turned his rescue efforts to the union. Harry assembled various union bigwigs at corporate headquarters and in his most ethical manner laid out the facts about the company. His presentation concluded with the statement that he could not guarantee that workers would get paid in February. The room was silent when he finished. Then one person raised a hand and asked, "but what about the health and pension plan payments - surely you intend to make those." Harry looked around the room. He saw that no one there, including himself, was less than 50 years of age. Moreover, over 75% of FSI's workforce was older than 48 years. He realized immediate that he would never be able to wring any wage concessions out of his worker's union. All they cared about was the value of their homes, their health insurance, and their fast approaching retirement. As he drove home from the meeting, Harry thought about throwing in the towel and filing for bankruptcy. He felt that bankruptcy was not only the wrong thing for FSI but that it would harm his own career. The next morning Harry got some better news. One of the private investors he had visited with made an unsolicited offer of $68 million to buy the Kentucky coalfield. The offer was contingent on Harry accepting it by the end of the day and his not seeking any competing offers. Harry was torn and unsure what to do. On the one hand, the money would solve FSI's payroll and other payment's issues for at least two quarters. But on the other hand, the offer was for less than half of what FSI had paid for the company just a year before and during the interim period the price of bituminous coal had risen by 12%. Harry countered by asking for $141 million from the prospective buyer. After the laughter subsided, he was told, "look you're out of choices. Either you take $68 million from us today or you can file for bankruptcy tomorrow." The news wires reported the sale of the coal company that evening at 6:00 p.m. Question :

Was Harry Lewis an Ethical Manager?"