United ESOP highlights a problem

[Dan Bell <dbell@kent.edu>]

The article below from the Chicago Tribune highlights a problem with
ESOPs in public companies. It mentions a machinist who acquired 1500
shares of United Airline stock in exchange for wage concessions over
a multiyear collective bargaining agreement.

At one point, the share value was as high as $100, but after the
airline industry got into trouble, culminating in the September 11th
debacle, share value had tumbled to one-sixth its peak value. 
So this person saw his account go from $150,000 to $25,000.

Other UA shareholders had the option of cashing out when the decline
began and moving to a safer investment. Those in the ESOP did not.
This is unfair.

One possibility is that the ESOP Trustee should have done a better
job managing the beneficiaries' assets. Since UA stock is public,
could the Trustee have sold these shares and replaced them with
other investments in the ESOP? My guess is the initial answer is
that this is not permissable under the ESOP rules; however, it
probably should be.

Public company stock is subject to greater swings in price than privately
held companies. Thus, Trustees for ESOPs of public companies should have
greater responsibility and flexibility to be able to respond to the
market.

Perhaps our legislators need to consider adapting the rules a bit.

Dan Bell

Chicago Tribune.
>--------------------
>United ESOP not flying high
>--------------------
>
>'94 deal fails to bring wealth, labor peace
>
>By James P. Miller
>Tribune staff reporter
>
>December 2, 2001
>
>A few years ago, United Airlines ramp worker Wally Blankenship was figuring
>on a comfortable retirement after more than three decades of loading luggage
>and freight into the metal bellies of United airplanes.
>
>After all, in addition to the company pension he would receive, he owned
>1,500 shares of stock in United parent UAL Corp.--shares he'd paid for with
>painful wage givebacks in the mid-1990s as part of a partial employee buyout
>of the Chicago carrier.
>
>When the shares briefly touched a high of $100 at the close of 1997,
>Blankenship was thrilled to see that his investment had become worth about
>$150,000.
>
>"If I could've got them out then, I would have," says the West Virginia
>native. "I'd rather be safe."
>
>But under the federal laws that govern employee stock ownership plans like
>the one UAL workers joined, employees can't claim their shares until they
>leave the company or retire.
>
>Blankenship volunteered five weeks ago to end his 32-year United career a
>little earlier than he'd expected, in hopes that doing so would prevent a
>younger worker from getting one of the 20,000 pink slips United is handing
>out.
>
>But his retirement won't be as prosperous as he'd once hoped. Over the past
>several months, United and the airline industry have hit some of the worst
>conditions in industry history, and Blankenship's UAL shares are now worth
>just $25,000, less than one-fifth their value when the stock was at its
>high-water mark.
>
>"It's just been a free fall," laments the former machinists union member.
>
>Along with workers at trouble-blasted companies such as Enron Corp., Lucent
>Technologies Inc. and Comdisco Inc., United workers are discovering an
>unwelcome downside to the trend in which U.S. companies are making their
>rank-and-file workers shareholders. Falling company stock prices can
>devastate workers' nest eggs, compounding the pain of layoffs, pay freezes
>and other corporate belt-tightening moves.
>
>While Wall Street's smart money has rushed out of airline stocks since Sept.
>11, the more than 50,000 United employees who participated in the ESOP have
>been stuck on the sidelines, watching helplessly as fellow UAL owners with
>more flexibility dump their shares and move into safer investments.
>
>The ramp crew Blankenship oversaw talked every day about the plunging value
>of their UAL holdings. But, sighs the resident of rural Kingston, "there was
>nothing we could do about it, just sit there and cry over our spilt milk."
>
>To a workforce already mad at management and worried about job cuts, the
>nose dive in UAL's stock has made the ESOP a double whammy: Early on, the
>ESOP failed to provide the hoped-for worker-management harmony--but workers
>now are calling the buy-in a disastrous financial investment as well.
>
>"Fifteen months ago my ESOP retirement account was worth over $350,000, and
>two weeks ago it was a little less than $50,000" says Herb Hunter, the
>23-year veteran United pilot who serves as spokesman for the carrier's
>pilots union.
>
>The ESOP "was a bet we made," Hunter says, "and it didn't work."
>
>This is not the way the historic buyout of UAL was supposed to work.
>
>In 1994, when UAL's employees granted an estimated $4.9 billion in pay and
>work-rule concessions in exchange for a 55 percent stake in the airline
>holding company, backers predicted employee ownership would yield
>productivity gains and sweetened relations between labor and management.
>
>Provisions included in the agreement spurred the machinists union to
>proclaim that the plan would "demonstrate to the business community that job
>security and corporate profits are not mutually exclusive."
>
>But the new era of harmony flickered only briefly before old tensions
>returned at what is by far the biggest U.S. company that's majority-owned by
>its workers.
>
>"In the beginning, we had expectations that things would get better,"
>Blankenship says, "and for a time they did." Some O'Hare ramp workers came
>up with cost-cutting ideas to streamline baggage handling. When managers
>eased workplace restrictions, he recalls, employees "felt they were doing
>things to make us part of the process." And of course, he adds, "when your
>stock's going up, you're happy."
>
>But the enthusiasm burned out in a year or two, and after the widely liked
>Chief Executive Gerald Greenwald retired in 1998 to be succeeded by James
>Goodwin, workers and management split once again into a hostile
>us-versus-them format.
>
>Seeds of failure
>
>What was wrong with United's employee buyout? Lots of things, some experts
>say. The constituencies that put UAL's ESOP together "did nearly everything
>you can think of that you shouldn't do," says Corey Rosen, head of the
>pro-ESOP National Center for Employee Ownership.
>
>Although most successful ESOPs convey ownership to workers as a benefit,
>said Rosen, UAL's was unusual in that the workers paid for their shares.
>That undercut the plan right from the start.
>
>And although most plans run indefinitely, UAL's plan simply disbursed the
>shares the workers were buying over a nearly six-year period that expired in
>mid-2000.
>
>Because "neither side thought this was permanent," says Rosen, neither made
>"the changes they needed to make it work."
>
>The underlying problem, according to Rosen and United employees, was a lack
>of commitment on both sides. Just as stock options can be an incentive for
>corporate executives, productivity improvements naturally follow when
>workers are given a stake in the enterprise, ESOP proponents contend.
>
>But the 1994 United buy-in was a marriage of convenience for management and
>workers. The workers wanted to preserve their jobs, while management was
>desperate to reduce costs.
>
>Spurred by public hints from then-CEO Steve Wolf that the cash-strapped
>company might fare better if it were broken up and sold off in pieces,
>United's unions launched a couple of unsuccessful bids for a controlling UAL
>stake, but their efforts fell short until UAL's board finally decided to
>back the 1994 version.
>
>United sold the 62 million shares to its workers for concessions that cut
>costs and boosted its balance sheet for several years.
>
>Workers say they felt obliged to take control of UAL because Wolf's
>proposals could have cost thousands of jobs. "I was against it," said
>Blankenship. "But we were told in no uncertain terms that ... Wolf was going
>to break up the company" if the workers didn't buy control.
>
>"I'm a by-force investor," says United airplane mechanic Chuck Brinkman who,
>in his role as secretary-treasurer of the machinists local in Indianapolis,
>says he's heard plenty of worker beefs about the ESOP in recent months.
>
>Greenwald, the auto industry executive who led the company following Wolf's
>1994 departure, earned praise from UAL's employee-owners early on when he
>killed a purchase of US Airways because of opposition from the pilots. Last
>year, in contrast, Goodwin ignored the pilots' disapproval and again moved
>to acquire US Airways. Federal regulators eventually spiked the proposed
>deal, but the resulting enmity of United workers helped bring about his
>resignation one month ago.
>
>Refusal to change
>
>Issues of ownership and autonomy aside, at bottom "the whole purpose of the
>ESOP was to make UAL a more employee-friendly company," says Wright B.
>George, a United pilot. "That didn't take place," he says, "because there
>were hard-liners in both management and the unions--residual dinosaurs that
>couldn't adapt to the new reality, the new paradigm--they just couldn't
>change."
>
>UAL officials say the deal accomplished what it needed to. The lower cost
>structure it provided "sharpened our competitiveness," says spokesman Joe
>Hopkins, in part by clearing the way for United to launch a low-cost shuttle
>operation to compete with rival Southwest Air.
>
>UAL's stock "is subject to external factors," he said, adding that the ESOP
>was structured as a supplement to the workers' standard retirement package.
>The ESOP's performance as an investment will improve when UAL's fortunes
>rebound, Hopkins said, and--assuming workers can hold off on selling the
>shares--the value of those holdings will one day increase.
>
>"All I know is I'm making the same pay I was making in 1994," says one
>machinists union member employed at O'Hare who didn't want his name used.
>With the plunge in the ESOP shares, "Some of us have lost sixty or seventy
>thousand dollars. ... People could have had a house, a better life."
>
>While the ESOP was a necessity, he says, "it certainly hasn't worked out the
>way it could've."
>
>
>Copyright (c) 2001, Chicago Tribune
>
>
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--
Dan Bell
International Program Coordinator
Ohio Employee Ownership Center
Kent State University
Kent, OH 44242
(330) 672-0333 << Direct number!
(330) 672-3028 general office number
(330) 672-4063 fax
dbell@kent.edu
http://www.kent.edu/oeoc/
http://cog.kent.edu