December 7, 2015 Read More →

Convicted Coal Baron Should Be Required to Disgorge His Ill-Gotten Gains

Don Blankenship Boasted a Horrific Management Style That Came With Horrific Costs

Former Massey Energy CEO Don Blankenship, convicted on a misdemeanor charge last week of violating mine safety laws in a prosecution that came out of the Upper Big Branch Mine disaster, got off lucky. Twenty-nine miners died at Upper Big Branch in April 2010.

During much of the aftermath of that horror, Blankenship drew outrage for what we see now was a reckless drive to maintain cash margins by cutting corners in a high-cost business environment.

The economics of what Blankenship did at Massey highlight a fundamental challenge: Central Appalachia is a mature mining region, where costs have risen because it was becoming more expensive to get coal out of the ground. What Massey saw as pesky health and safety rules, if skillfully avoided, could save money and prop up company returns and share value. It was up to the board—and shareholders, too—to step in and police what had essentially become a brand of rogue management.

One of those who pressed for Blankenship’s immediate resignation after Upper Big Branch was Tom Dinapoli, the New York State comptroller who at the time ran one of the biggest public pension funds in the world. DiNapoli understood even before Upper Big Branch that the management style at Massey was ultimately counterproductive and that those at risk included shareholders. He said as much publically several months before Upper Big Branch when he filed a shareholder resolution calling for better corporate governance at Massey.

What Napoli and others knew was that most of the coal in Central Appalachia wasn’t minable under standard market conditions. The regulatory rules of the road notwithstanding, the region had been a problematic place to invest for over a decade. Blankenship’s recklessness only proved that point. While Blankenship railed against regulations, he also violated them. The consequences of such an approach proved extreme.

One takeaway for investors, particularly as we anticipate workouts and bankruptcies across the industry, is that coal like that found at Upper Big Branch is not profitably minable without serious risk to the workers in the mines.

IT’S WORTH ASKING TODAY—AS THE INDUSTRY CONSULTS A HOST OF  LAWYERS, INVESTMENT BANKS AND NEW MANAGERS TO HELP IT HIT RESET—whether new business models assume compliance with federal mine safety rules. And it’s worth insisting that the industry not be allowed to promote a misleading picture of mine profitability built on skirting the rules.

One additional point: It seems a tad unfair that Blankenship—who is probably worth $100 million based on his Massey compensation over the years (if he’s worth less, he should find a new accountant)—be allowed to keep the largesse he has pocketed by risking worker health and safety. I understand that he has been acquitted of the securities fraud charges that were part of the Upper Big Branch case, but as a corporate matter, supporting recklessness of such magnitude is support the worst in business leadership.

When I was deputy comptroller for New York State, we took an unprecedented tack with the debacle around WorldCom. Our pension fund persuaded a judge to go after the personal assets of the WorldCom board and its executives. It was an unprecedented move but it was called for—and it was successful—because the people who ran WorldCom had systematically misled investors and employees about the viability of the company and the suitability of its investment strategy.

Many Massey families have settled their claims against the company, although full compensation is impossible of course because their losses clearly involve so much more than money. But money does matter. If Blankenship keeps his ill-gotten gains, it would mean that recklessness has been rewarded and that profit for the few has trumped safety and prosperity for the many.

Tom Sanzillo is IEEFA’s director of finance.

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