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Tuesday, Nov 10, 2009
Did employee stock ownership drive the airline into bankruptcy?
Dec 12, 2002 | In 1994, when United Airlines was on the brink of a financial crisis, the company's executives and its employees embarked on a grand experiment in corporate governance. In a marked departure from years of tension between labor and management, the parties came together to save the airline. Employees agreed to forgo billions of dollars in wages in order to keep down the airline's operational costs, so that United could more easily compete with low-cost airlines such as Southwest. In return, the airline would hand over half of the company to the workers, who would have a say in the direction of the airline and would supposedly directly benefit from its future success.
The deal, which created one of the biggest employee-owned companies in America, was seen as a new model for the airline industry, which has always been fraught with fractious labor relations. "Inevitably, other companies will stand up and take notice," Robert Reich, Bill Clinton's first labor secretary and a key supporter of the United plan, told the New York Times at the time. "From here on in, it will be impossible for a board of directors to not consider employee ownership as one potential business strategy." In an effort to show the public that everyone at United was now on the same page, the company changed its slogan from "Come fly the friendly skies" to "Come fly our friendly skies."
On Monday, United Airlines' corporate parent, UAL, filed for bankruptcy. While there's no end to possible reasons for United's failure -- the sour economy, the Sept. 11 attacks, competition from Southwest Airlines and its no-frills ilk -- the company's troubles have prompted some conservative pundits to decry the notion that employee ownership can steer a company to success. The syndicated columnist Bruce Bartlett, for instance, took the United bankruptcy as a sign that employee-ownership programs represent a "left-wing," essentially Marxist idea that "works a lot better in theory than practice." Bartlett wrote in a recent column that employees who have an ownership stake in companies often use their power to "block productivity-enhancing changes" rather than improve the bottom line, and he concluded that what happened at United proves that "employee ownership may still make sense as a way of privatizing government assets, but it is clearly no ticket to higher profits and productivity."
Bartlett's analysis is too simplistic by half. Advocates of employee stock ownership plans, or ESOPs, point out that United's plan was not typical of most employee-ownership situations and was probably doomed from the start. It was a strategy of convenience for United's management and its various labor groups, each of which had a different idea about what "employee ownership" meant. Indeed, a majority of the company's workers -- its flight attendants and its nonunion employees -- were never even part of the plan. As a result, say champions of ESOPs, employees at United never quite acted like owners, and management didn't run the company as if the employees had a say.
It's senseless to conclude anything about all ESOPs based on what happened at United, says Corey Rosen, who directs the nonprofit National Center for Employee Ownership. "I have yet to see a story that says investor ownership failed US Airways" -- which declared bankruptcy in August. "You could make a good argument based on that situation that investor ownership was a bad model at the airlines. But it would be a really silly point to draw from the experiences of one airline."
Still, after United's failure -- not to mention the problems at Enron, WorldCom and all the dot-coms, where employees saw the retirement and stock-option fortunes they'd invested in their companies melt away -- Americans may now be leerier than ever of the prospect of owning their bosses' companies. Should they be? Does it make sense to have workers telling companies how to behave?
It does make sense if the plan is right. If you study what was wrong with United, and what's right with successful companies in which employees have equity, one thing is consistent: When firms make employees feel as though they have a say in what a company does, and when employees feel as though they're working alongside managers rather than against them, companies work better. That might seem like a Pollyannaish notion. Owners and workers are bound to be at odds, goes traditional thinking -- that's basic capitalism.
But that's not true. Contrary to what some conservatives say, employee ownership can increase productivity, decrease production costs, and reduce the waste that comes with a bad labor-management environment. It can do a lot more, too. If the corporate world embraced employee ownership, we might see companies that were more accountable to their workers and to the world. We wouldn't see CEOs making 500 times as much as the average worker, we wouldn't see unions making obviously untenable demands of their companies, and -- with all the new wealth flowing to workers -- we could reduce the gap between the country's rich and poor. And we could still call it capitalism.
