VOICE OF REASON
Of all the major problems that confront senior executives these days—strategic, tactical, personal, financial—one that has always struck John Surma as especially important is context. Others might call it perspective; a sense of what a business does, the major movements of people and material, an idea of where the company fits in the wider world of competitors, suppliers, customers, employees and, of course, investors and shareholders.
Here’s an example. After 20 years as an accountant for Price Waterhouse, and periods as finance chief for Marathon Oil and president of its convenience store chain Speedway SuperAmerica, Surma was suddenly made responsible for the oil company’s supply and transportation operations. About which he knew very little. Skeptics might suggest that, in fact, he wasn’t qualified to lead an oil company’s transport business (nor, for that matter, its refineries, which was his next job).
But Surma was not daunted. Just the opposite. He delights in new jobs and the essential adventure of moving to new cities, meeting new people and acquiring new knowledge. His basic attitude is that good leaders can move into entirely new businesses if they are surrounded by people who actually understand the nuances and subtleties of those businesses, and if the leaders work hard to earn the company’s trust.
So one night, John Surma found himself riding on a Marathon Ashland towboat with Captain Lonnie Ryan, who for four decades on the Ohio River piloted fat, petroleum-filled barges, lashed end-to-end and side-by-side to create floating behemoths more than 1,100 feet long. It can take two miles to stop such a tow. On this night, it was headed from Marathon’s big Catlettsburg, Kentucky, refinery to Cincinnati, Ohio, and Surma was aboard to learn and absorb.
The experience was intense for the observant passenger. “We’re going down the river, and he’s blowing the whistle. Trains are going by. People were on the shore. And then we got to a lock,” says Surma
The lock looked short. The barge tow looked long. “So how long is that lock?” asked Surma. “He said it was something like 1,200 feet, and we were something like 1,198 feet long. So I asked him, ‘What are you going to do with those extra two feet?’ And he said, ‘Probably one on either end.’”
As Ryan eased the tow into the lock, Surma ran to the bow and watched as the lead barge stopped a foot away from the lock’s end. He ran to the stern and saw another foot behind the towboat.
“It gave me an idea of the precision and care with which everyday things are done. It was extraordinary,” recalls Surma. “I’m thinking, okay, he’s been doing that for nearly 50 years, and he got it just right every time. It’s vivid in my mind.”
LEARNING THE NUANCES
Surma rode delivery trucks; he pumped gas at the company’s truck stops. He read voraciously, devouring technical tomes about oil refining, “trying to understand the flow. If you’ve got a barrel of this, what do you do with it? What comes out of it? How does it work? What are the major chemical transformations that material goes through?
“I know that I’ll never have complete command of the nuances the way people that do it all the time would, but I had to have some appreciation, some understanding, for what our people did,” Surma says. “I did a lot of physical touching, feeling and visiting. And I still do. I’ve been surprised and impressed by everything, and by the daily struggles of ordinary people trying to make ends meet.”
Surma, today, is chairman and CEO of United States Steel, and to hear him tell it, he got there because of astonishingly lucky breaks, serendipity rather than skill, and one happy circumstance after another. “It’s not uncommon for me to be with people a lot smarter than me,” he suggests. Some of those people, he says, “thought, I guess, that I was a person who had some potential for something.”
Aw, shucks. But don’t, for a second, believe that Surma’s lucky stars got him to where he is today. Competitive (he still plays senior league hockey), inquisitive (history is a special interest in his continuing search for context), humorous (slightly under the weather on the day of his interview with Forward, he dismissed concern about his health by saying he only had “H2N2”, not the real thing) and immensely energetic, Surma has established himself as a steel industry leader willing to take unusual steps to ensure the health of his company and of the North American manufacturing base.
“I believe John is one of the most thoughtful and sophisticated steel executives I’ve ever met,” says David S. Sutherland, former CEO of IPSCO (now part of Sweden’s SSAB) and a member of the U.S. Steel board. “There are many talented people in the industry, but [Surma] stands above most of them. He’s an exceptionally quick study, a very thoughtful individual who is passionate about his job, about the company, the industry and the country.”
Says Ward J. Timken, Jr., chairman of the Timken Co. who has worked with Surma on the American Iron & Steel Institute board: “He’s a very level-headed, pragmatic and thoughtful businessman and obviously a very smart guy. He understands the industry as well as any of the executives I interact with. I have a lot of respect for him and what he has done for U.S. Steel.”
PITTSBURGH IN THE BLOOD
Surma, whose grandparents were immigrants from Italy on his mother’s side and Eastern Europe on his father’s, grew up seven miles from the U.S. Steel Tower in downtown Pittsburgh. His father worked in clerical jobs, his mother at a savings and loan. Young John went to Penn State “without any particular expectations of either life or education,” he says. He studied accounting, which he liked because it is “orderly and structured” and came easily to him.
Price Waterhouse hired him right out of school in 1976. He was elevated to partner in 1987 after working with a variety of industrial clients in the steel, oil and gas, chemicals, mining and manufactured products industries, including a stint in Manchester, England. Surma became the firm’s expert in environmental accounting and disclosure. He also spent 1983 as an executive staff assistant to the vice chairman of the Federal Reserve Board as part of the president’s Executive Exchange Program.
Surma found his two decades as an accountant to be fascinating and professionally fulfilling. “Price Waterhouse was way beyond my expectations out of life,” he says. “I was happy and just working through a very productive, rewarding and beneficial career. I loved what I did at Price Waterhouse.”
One of his clients loved it, too. That was USX Corporation, the combination of the old U.S. Steel and Marathon Oil. Surma, filled with a sense of adventure, agreed to become Marathon’s senior vice president, finance and accounting, in 1997. The next year, to gain operating experience, he was named president of Speedway SuperAmerica, where he sold, as he famously and frequently puts it, gasoline and “the six basic food groups—sugar, salt, fat, caffeine, nicotine and alcohol. The Surgeon General recommends two servings of each daily.”
Surma took over supply and transport for Marathon Ashland Petroleum in 2000, and became president of that company in January 2001.
With the breakup of USX Corporation looming, Surma, in late 2001, was asked by Thomas J. Usher, USX chairman and CEO—as well as Surma’s mentor and friend—to join him at the soon-to-be-independent United States Steel. “I said yes, without a lot of thought. It felt like my destiny, and I thought it was worth a shot,” says Surma.
Certainly, it was worth a shot, and his advancement was rapid. Surma became vice chairman and CFO of the steel company on January 1, 2002. Just 14 months later, he was promoted to president, and several months after that, in June 2003, he added the chief operating officer designation. By October 2004, he was CEO of U.S. Steel. He assumed the additional title of chairman on February 1, 2006 when Usher retired.
ROOM FOR IMPROVEMENT
Surma and Usher identified four major strategic areas where U.S. Steel needed to improve if it was to achieve stability and prosper. They concluded that the company would have to grow substantially to be globally competitive and to achieve greater economies of scale. U.S. Steel needed to do a better job with its customer relationships and become more responsive to specific customer steel needs. The company needed to reach a broad accommodation with the United Steelworkers (USW). And, as Surma’s personal issue, U.S. Steel needed to improve its safety record substantially.
How it has all played out is partly a reflection of Tom Usher’s determination to leave the company in good shape, and John Surma’s equal determination to take the company to new levels of achievement.
Take, for example, the company’s relationship with organized labor. If there’s a “third rail” of steel industry leadership, it’s relations with labor unions. U.S. Steel’s labor history, in particular, has been legendarily horrible, dating back to the bitter 1892 Homestead strike by the Amalgamated Association of Iron and Steel Workers against Carnegie Steel Company, a predecessor. That strike ended in a day-long gun battle between steelworkers and Pinkerton guards, with 12 killed and dozens wounded. The Steel Strike of 1919 was the first major nationwide walkout against the company, startling at the time but ultimately unsuccessful after three and a half months. More recently, steelworkers walked out in 1946, 1959 and 1986-1987. To say that the union and management were often at each other’s throats would be an understatement.
“We had to find a different way forward with the union to really get to the productivity that we needed,” says Surma. “We were putting capital into our operations without getting the productivity that you would think you’d get. We and the union were in a difficult place together, and we had to work together to get out of it.”
So Surma began a long series of meetings in coffee shops, hotels and elsewhere, with Ron Bloom, at the time a top strategist for USW President Leo Gerard. Bloom is now head of President Obama’s auto industry task force and also the White House official named to oversee manufacturing policy. “For about two months we spent a lot of time together, with some colleagues in and out, just talking through the union’s objectives, how they think, what they want, what their vision is, and what we wanted,” says Surma. “But mostly it was just the two of us, and then later Tom Usher and Leo Gerard together. We wanted to find a way forward that would be successful, and it just kind of coalesced.”
Those meetings led to a 2003 contract that, among other things, provided for a 25% to 30% workforce reduction (about 6,000 employees) and reduction of mill job classifications to six from 30, adding considerable operational flexibility and productivity. The union, in return, secured $621 million to compensate those departing workers, plus a profit-sharing program that paid out $523 million to employees in the rich 2006-2008 period.
VOICE FOR MANUFACTURING
What’s more, U.S. Steel and the steelworkers now campaign together on behalf of North American manufacturing. Among other things, U.S. Steel and the USW together formed the extraordinarily active Alliance for American Manufacturing, which is led by former AFLCIO lobbyist Scott Paul. In the latest contract signed with steelworkers in 2008, U.S. Steel sets aside 12 cents per ton of shipped steel for a Public Policy Fund to finance joint pro-manufacturing and pro-steel activities. Other companies also contribute to the fund, and Surma and Gerard frequently issue statements jointly, creating what Surma calls “a pretty formidable voice….There are plenty of things for unions and management to argue about. But we try to discuss things that we agree on, like the importance of manufacturing, the importance of a thoughtful trade policy, pension reform, and the importance of trade law enforcement.”
Says Gerard, “John is very honest in his dealings with the union. We negotiated a collective agreement that gave our membership an opportunity to retire with dignity. We gave our members an opportunity to use their knowledge and creativity, and not just their backs and arms, and to get well compensated for it.” He adds, “Surma has stood up for the industry and he has done it well. We have a common understanding that you can’t make very many things, in any industry, without using steel. John is committed to making things in America.”
Forward spoke with Surma in his U.S. Steel Tower office.
How well have you done with the other three strategic goals of growth, improved customer relations and safety?
We have today a bigger platform that gives us a lot more operating flexibility and efficiencies. We were a company with about 10 million tons of capacity in 2000, all of it in the United States. Today, our capacity is over 30 million tons in four countries. The pieces work well together and have synergy value in operating, commercial and administrative ways. It’s not foolproof, as we’ve discovered in this recession, but it has worked well for five or six years.
Size is good where you’re able to put things together in a contiguous area, where you have operating synergy, real commercial synergy and administrative opportunities to reduce cost. Getting larger, more tons, in disparate areas that are just in a kind of confederation, I’m not so sure that’s great.
How about customer relationships? What’s been done there?
We’re helping customers to develop their products and strategies with, for example, advanced high-strength steel in the automotive sector. We couldn’t be left behind with products like that. We have doubled the number of research facilities to four. One of them, in Munhall, Pennsylvania, developed a steel for the U.S. Olympic luge team that is strengthened by contact with ice.
And how about safety?
When I became president in 2003, we were ranked No. 1 or No. 2 among steel mills in safety, but that was like being valedictorian at a reform school. We began to re-orient everybody into making safety the No. 1 priority at the company. Everybody’s pay is based in part on improvements to our serious injury statistics.
In 2004, our recordable injury rate was more than two per 200,000 hours worked. We reduced that by 65% by 2008. So there are hundreds of people who have gone home to their families at the end of their shift who might have been injured five years ago. Now, we want to get the injury rate to zero. We have some very big facilities, such as iron ore mines in Minnesota, steel plants and pipe mills that will go months at a time at zero. Well, if you can do it months at a time, you should do it all the time. Zero is possible.
Companies of all sizes have had to idle plants, close others and lay off large numbers of workers to survive this recession. U.S. Steel has been no exception. Did you anticipate this?
Not really. We thought the back end of 2008 might be slower, but we thought it might be 5% or 10%. We did our own stress tests of what it would be like if business dropped 30% or 40%. But none of us had an expectation that by the time we got to the end of the year apparent steel demand would be off by 60% and operating rates of the industry would be below 50% for more than six months.
But even if we had known it was going to happen, I’m not sure in early 2008 we could have done anything differently. If we had reduced production quicker, all we would have done was not sell something we made a lot of money on during the first nine months of the year. By the end of 2008, our steel and process inventories were as low as they’ve ever been. So even with perfect knowledge, the results would not have been much different.
Did you ever think that this is getting really close to the mark in terms of the company’s long-term viability?
Sure. But it all depends on your view of the long-term or the intermediate term. Let me illustrate that with a story. One of the plants that came along with the acquisition of National Steel in 2003 was the Granite City plant, near St. Louis. That plant had struggled. The previous owners told us that we might want to shut it down. So we took a look, talked to the people there, assessed the customer situation and said that we would take care of Granite City. The conventional wisdom there was to shut it down and if we had done that, everybody would have said that’s exactly the right thing to do, the responsible thing to do.
From 2003 to 2008, we earned $1.2 billion at Granite City. So yes, we could make decisions today that everybody would say are entirely appropriate to do; how wonderful, how responsible. If we had done that at Granite City we wouldn’t have $1.2 billion. I can tell you, that’s a hard decision. That’s what I get paid for.
How do you evaluate the impact of China’s steel industry on the rest of the world?
Half of the world’s steelmaking capacity is almost exclusively controlled by the state in China. They have a system of capital allocation with effectively no cost. They have a variety of subsidies on energy and materials. They have labor and environmental standards that are different from ours. If all that is what they need to attain their development plan, then I wish them good luck. It’s none of my business, basically.
But when a product of that system leaves China and gets into the world trading system, then there are rules. They have to abide by those rules, and if they don’t, we will take aggressive and immediate action.
I’d say the same thing about their currency. This is a broader issue that cuts across all sorts of other things. But when you look at what’s happened to the dollar against all other floating currencies, and there’s the RMB (the renminbi, or yuan, China’s currency) rock solid, that makes me wonder. We have an unsustainable trade deficit with China. We have an unsustainable budget deficit here that’s aided and abetted by that. We’re allowing them to accumulate U.S. dollar reserves that they can then use to exercise policy objectives that are bad for our country. We’ve got to find a way out of this. Borrowing and buying imports from China is not a good thing.
How about the rising tide of climate regulation and legislation?
There is extreme danger in this if it’s not done properly and well. There’s extreme danger of severe damage to the economy and really a reordering of the global economic structure.
We are, as an industry, the most efficient in the world in terms of CO2 emitted per ton of steel produced…. We’re really good at it. If our lawmakers decide to achieve emission reductions by suppressing domestic production of steel, they will have eliminated a very competitive, vibrant sector, with a million jobs directly and indirectly that depend on it. We would still need steel, which would come from regions with emissions of 2.5 or 3 tons per ton of steel. That would be on everyone’s scorecard the worst possible result—damaging to our domestic economy, increasing unemployment and increasing global emissions.
At times like these do you find history compelling?
Oh, yes. I like to read about our company’s founders and others of that age—(J.P.) Morgan, (Charles) Schwab, (Andrew) Carnegie, (Cornelius) Vanderbilt, (Jay) Gould and (Henry) Frick. There’s one thing this tells me. There are relatively few things that are actually that new. [They fought] about the same stuff we fight about. I marvel at how current they were. The issues in business happened a little slower, but they are similar to what we see today. It’s fun.