Good results at KGHM prompt pay demands

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The recent good financial performance of KGHM, a major Polish copper producer, has prompted employees to seek a share of the increased profits. In December 2005, the Copper Industry Workers Trade Union (ZZPPM) initiated a collective dispute, calling for a 10% general pay increase and the reallocation of a third of the workforce to higher pay brackets.

Growing demand for copper in the international markets and the attendant increase in prices have caused an increase in the value of shares in KGHM Polska Miedź SA (Kombinat Górnictwa i Hutnictwa Miedziowego, Polska Miedź SA, KGHM), Europe’s biggest producer of copper, on the Warsaw Securities Exchange (Giełdzie Papierów Wartościowych w Warszawie, GPW). KGHM’s shareholders, the State Treasury chief among them with a 44% stake, have been pressing for an allocation of profits whereby most of the financial surplus would be devoted to a dividend pay-out (there has been talk of a dividend corresponding to at least 30% of the profit). The State Treasury is the shareholder most interested in a large dividend disbursement, for it stands to gain the most from such a move. The State Treasury’s situation, however, is a paradoxical one. In the short term, State Treasury control over the company provides for increasing revenues to the national budget, including through dividends. In the longer term, however, the State Treasury is also - or, perhaps, primarily - interested in providing for the stability and sustained growth of the business entities it controls. To a large extent, the financial success, or otherwise, of entities, such as KGHM, in the field of extracting and processing raw materials depends on the prices commanded for these raw materials in the global markets. At the same time, the fact that a mineral extraction company is posting good profits has little to do with passing fads or well-aimed marketing campaigns but is closely interrelated with the its operating costs, most particularly with the outlays which it must make in order to obtain a unit of the raw material in question.

Arguably, when these general points are applied to the specific case of KGHM , the conclusion would be that the company would do well to make new investments. The most recent expert studies indicate that the copper deposits now mined by KGHM will last for at least another 40 years, while a new deposit, known as Głogów Głęboki, will require considerable investments before it can be involved in industrial-scale production. The directors of KGHM take the position that, if the shareholders dividend is too generous, the implementation of these plans will be put at risk. Proponents of a large dividend, meanwhile, maintain that the necessary investments will be spread out in time, and also that, should KGHM require additional cash to finance new projects, it can fall back on the profits accruing to it as a major shareholder in the Polkomtel mobile telephony operator.

A competing proposal for utilising at least some of KGHM’s profit has been made by the employees, who are calling for pay increases through the assignment of some 30% of the workforce to new pay brackets. Furthermore, employees are increasingly discontent with the current scheme whereby employees receive bonus payments out of KGHM’s profits - the last such bonus was disbursed in November 2005 and corresponded to one month's average monthly remuneration at the company.

Trade union demands

The Copper Industry Workers Trade Union (Związek Zawodowy Pracowników Przemysłu Miedziowego, ZZPPM), which is a member of the All-Poland Alliance of Trade Unions (Ogólnopolskie Porozumienie Związków Zawodowych, OPZZ), first demanded the reassignment of a third of the KGHM employees to new seniority levels and thus pay brackets was first made in September 2005. A collective dispute in that month (PL0510102F) did not bring about all the changes sought by the union, and accordingly it chose to take the matter up again in December, when it launched a new dispute, demanding:

  • a 10% increase in basic pay as of 1 January 2006;
  • the reassignment of a third of KGHM employees to new seniority levels in January 2006;
  • an application by the KGHM board of directors to the company’s general shareholders' meeting for a PLN 100 million write-off from the 2005 profit towards the in-house social benefits fund; and
  • an increase in the number of jobs in the production division (the union argues that the present employment level is not sufficient to guarantee safety).

ZZPPM's demands were criticised by KGHM management, which challenged both their substance (the directors dismiss the allegations of insufficient workplace safety) and procedural aspects. Management states that the pay demands run contrary to a company agreement whereby pay negotiations should commence after 10 January of the year in question and be preceded by the definition of a frame of reference in the form of the company budget. These reservations, however, did not prevent representatives of management from embarking on negotiations with the union; the first round of talks was held on 4 January, and the next was scheduled for 13 January. To date, these talks do not appear to have produced any results.

Political aspects

The situation at KGHM has a number of political aspects. The State Treasury has five representatives on the company's nine-member supervisory board (positions that reportedly tend to be filled with reference to party affiliations), while the activities of the ZZPPM union also have a political dimension. In May 2005, the union's votes installed Wiktor Błądek on the board of directors as a workforce representative (PL0506101N). Two other supervisory board members, Leszek Hajdacki and Ryszard Kurek, also combine ZZPPM membership with positions on the company’s management bodies. Furthermore, the union's chair, Ryszard Zbrzyzny, is a member of parliament representing the Democratic Left Alliance (Sojusz Lewicy Demokratycznej, SLD).

A reshuffling of personnel at state-controlled companies in the wake of parliamentary elections is a well-established tradition in Poland, and the situation has been no different since the parliamentary and presidential elections in September-October 2005 (PL0510103F). December 2005 saw the suspension of Mr Błądek and Andrzej Krug as members of KGHM’s board of directors. Trade union activists sitting on KGHM’s supervisory board took a lively interest in these developments, decrying the suspensions as illegal and bemoaning their inability to impede the decision-making process (which related to difficulties with assembling a quorum).

As far as the Ministry of the State Treasury is concerned, the suspension of both directors was perfectly legitimate. A supervisory board session was nonetheless planned for 23 January in order to discuss their reinstatement. One week later, another session was due to be held for the purpose of discussing KGHM’s budget and long-term plans. The day after that should see a general shareholders' meeting; one of the items on its agenda concerns replacement of the supervisory board. Thus, one way or the other, personnel changes are under way at KGHM.

Trade union rivalry at KGHM

There are other tensions and rivalries at KGHM, other than those relating to prominent positions and decision-making powers. For example, the contract for the provision of transport services for the staff at the Zakłady Górnicze Rudna plant is controversial. At present, four of the nine vehicles used for this purpose are owned by the ZZPPM union. The contract was awarded following a second tender; the first tender was not completed on account of protests from ZZPPM. These developments caused the Independent and Self-Governing Trade Union Solidarity (Niezależny Samorządny Związek Zawodowy Solidarność, NSZZ Solidarność) to accuse ZZPPM of unfair exploitation of its position within the company, given factors such as its own supervisory board member.

Pay demands at companies cooperating with KGHM

The escalating pay demands arising in the wake of the increased profits made by KGHM have also extended to the companies that cooperate with it. The news that the average wage at KGHM stands at PLN 6,300 per month may have done much to increase such expectations, given that average wages at companies such as ZUW Urbex and Budmax (carved out of the original Polska Miedź copper conglomerate) are about one third of this figure. However, the combative mood of employees at the cooperating companies was dampened somewhat when it emerged that there might be a new competitor to provide services to KGHM, at a time when KGHM is exerting constant pressure on its external partners to keep costs down. The external partners, for their part, protest that they are already operating at subsistence level; they also argue that, in the longer term, lack of competition may encourage whatever new service provider appears to hike its prices. For the time being, KGHM continues to work with the same external service providers.

Commentary

Recent events at KGHM Polska Miedź SA demonstrate convincingly that increased earnings by a company do not necessarily translate into increased satisfaction levels among its workforce. Furthermore, in this specific case the contrary appears to hold true - the larger the earnings of the enterprise, the higher the dissatisfaction of its employees. How do we explain this seemingly paradoxical situation? As far as the unions are concerned, the answer is quite simple. If the company posts a higher profit, the union representatives argue, its employees should be able to participate in these profits to a greater extent. Where this privilege is denied to employees - the thinking goes - then they are quite justified in feeling aggrieved, and in taking actions geared at winning recognition for their claims.

Any analysis of the operation of KGHM must take account of a number of factors. Even if the financial position of the company is clearly important, allowance must still be made for social aspects (the situation of employees and the role of the trade unions), politics (the influence exercised by political parties and large unions) and technology (the modernisation required to compete successfully in the international copper extraction and processing industry).

It could be said that the relations between employees and management prevailing at KGHM are an anachronism even by the standards of the Polish economy. The main point of concern is the flourishing of informal coalitions between the unions and members of the management and oversight bodies, who make little pretence about their political affiliations. The fault lines are clear enough; the activists of the OPZZ-affiliated Copper Industry Workers Trade Union tend to work with SLD party stalwarts while NSZZ Solidarność work with the various parties descended from the 1980s opposition movement.

The ample reserves of KGHM mean that, for some time yet, an escalation of the tensions to the point where it is placed at risk can be avoided. Also, it appears that, given the present political situation and the extent of the company's resources, the State Treasury will be in no hurry at all to divest itself of its stake in KGHM. Furthermore, some state control over the company is guaranteed by virtue of legislatiin giving the state a golden share. Thus, jockeying for influence and the occasional bout of labour unrest seem to be the fate of KGHM for the foreseeable future. (Piotr Sula, Institute of Public Affairs [Instytut Spraw Publicznych, ISP] and Wroclaw University [Uniwersytet Wrocławski, UWr])

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