Re: United ESOP highlights a problem

[Mbindnerdc@aol.com]

Norm,

You are exactly right.  Congratulations on a wonderful analysis.

If United, Enron and the high tech firms which have now washed out had either 
gone private or stayed private you would not be hearing about massive value 
losses - as private firms which are 100% ESOP owned are independently valued 
rather than being valued by the market - which of late was driven by 
speculation.  Had United's workers gone the route that Norm suggested their 
share value would have remained stable, though it probably would not have 
inflated to the extent that it did.  Norm, you are right on about VBM and 
ownership culture.  It saddens all of us that United did not develop such a 
culture.  It gives a black eye to the ownership movement that they have not 
done so.  Enron would have also benefited from such a culture, which would have 
held management accountable.  

The whole Dot Com experience is very illustrative.  Much effort was wasted in a 
drive to "go public" rather than grown productive companies.  It was a bubble 
which had to burst.  Of course, you don't hear about those firms which stayed 
private and focussed on their revenues rather than their portfolios.  I am sure 
some of them are doing quite well.

Mike Bindner

In a message dated Wed, 5 Dec 2001  5:26:15 PM Eastern Standard Time, Norman 
Kurland <thirdway@cesj.org> writes:

> 
> 
> Dan,
> 
> I come at the problem at United Airlines from a different perspective
> than you or James Miller, the Chicago Tribune reporter. The root
> of the problem, as I see it, is inherent in collective bargaining from
> a "wage system" paradigm, rather than from an "ownership system" or 
>"Value-Based
> Management" (VBM) paradigm. For an alternative strategy and guidelines
> for lifting workers and labor unions from bargaining for the crumbs of
> the wage system to bargaining for real economic power and genuine economic
> justice, please click on South
> Bend Lathe - What Can We Learn from an ESOP Failure. or 
>http://www.cesj.org/vbm/casestudies-vbm/southbendlathe.html
> 
> Steve Nieman, the pilot at Horizon Airlines, (e-mail address: 
>haceca@attbi.com)
> has approached a similar situation at his company in a much more realistic,
> just and hopeful way, by proposing a total leveraged buyout by all employees
> (not just the pilots and mechanics) and the frequent flyer customers.
> Had the United employees demanded the kind of VBM labor deal Steve is trying
> to organize, (or the one that the National Maritime Union tried to implement
> in 1972 to save 5,000 in the American passenger vessel industry), many
> of the problems faced by the unions at United might have been avoided.
> 
> James Miller's article argues that because the machinists and pilots
> at United negotiated future givebacks amounting to nearly $5 billion in
> exchange for 55% of the shareholder equity, they paid dearly for the shares
> and when the values declined, the workers lost money. As I see it,
> the workers paid nothing for the shares, because without the reduction
> in labor costs resulting from the promised future givebacks when the ESOP
> was adopted, United might have gone into bankruptcy or out of business
> entirely. Out on the street and jobless, the United employees would
> have earned nothing (or much less at competing airlines) and would have
> had nothing to give back for the shares they received. Hence, the
> ESOP account that the United machinist saw shrink to $25,000 from $150,000,
> at least put him ahead by $25,000 plus everything else he earned in the
> form of wages, pension benefits, health benefits and other entitlements
> over the period since the "bad deal" was struck.
> 
> The core of the problem as I see it is the issue of "security" (i.e.,
> fixed entitlements) versus "opportunity" (i.e., moderate income and 
>entitlement
> security and maximum access to inclusionary ownership, equity growth, the
> democratization of corporate governance and a sharing of risk and profits.
> The best place to seek security is in the isolation cell of a prison.
> The best place to seek opportunity is in an employee-owned company where
> labor and managment are totally committed to a VBM culture and every 
>stakeholder
> is committed to producing maximum value for its customers. In the
> latter there are no limits to potential success.
> 
> Unfortunately, many labor leaders today try to bargain for total avoidance
> of risk, and such short-sighted and unrealistic thinking is what shackles
> today's labor movement and their members to the zero-sum ("win-lose") game
> of the wage system. In today's world of national and global competitive
> markets, those who opt for guaranteed security, protectionism and risk
> avoidance have consigned themselves to eventually price themselves and
> the companies they work for out of the market.
> 
> Walter Reuther of the United Auto Workers offered some sage advice to
> today's labor leaders in 1967 when he stated:
> 
> "Profit sharing in the form of stock distributions to
> workers would help to democratize the ownership of America's vast corporate
> wealth which is today undemocratic and unhealthy.
> 
> "If workers had definite assurance of equitable shares
> in the profits of the corporations that employ them, they would see less
> need to seek an equitable balance between their gains and soaring profits
> through augmented increases in basic wage rates. This would be a
> desirable result from a standpoint of stabilization policy because profit
> sharing does not increase costs. Since profits are a residual, after
> all costs have been met, and since their size is not determinable until
> after customers have paid the prices charged for the
> 
> firm's products, profit sharing [through wider share
> ownership] cannot be said to have any inflationary impact upon costs and
> prices."
> 
> (Hearings on the 1967 Economic Report of the President, Joint Economic
> Committee of Congress, p. 774.)
> 
> To make my point, the unions at United refused to trade in their defined
> benefit pension plan for maximum ownership opportunities, maximum profit
> sharing and dividend opportunities, maximum governance rights for their
> members, and a revised dues checkoff system linked to ownership benefits.
> They also opted for a house-divided by leaving out the flight attendants,
> and all other employees from ownership entitlements. Since they themselves
> never adopted an ownership culture within the unions, they never insisted
> on creating an ownership culture to permeate the corporate structure at
> all levels. Instead of creating co-owners with a long-term investor
> mentality, the United ESOP participants clung to the Wall Street short-term
> speculation mindset by thinking that it's better to gamble over shares
> of companies over which they had no control, than in investing in corporate
> assets over which they could have negotiated during the crisis for maximum
> ownership control, while still maintaining a wall of separation between
> union officials and management. This same misjudgment was made at
> the 100% ESOP at Weirton Steel, South Bend Lathe and several other companies
> in which the ESOP was adopted to save jobs and that eventually abandoned
> their ESOPs.
> 
> Today's Wall Street Journal (12/5/01, p. B4) reinforces my point about
> the bankruptcy of the "guaranteed" defined benefit pension system and the
> false promises being promoted under the umbrella of "progressive" policies.
> As some of you know, in my advocacy of radical reform of the pay-as-you
> go Social Security System
> 
> (How
> to Save the Social Security System , or 
>http://www.cesj.org/homestead/reforms/other/savingsocialsecurity-nk.html),
> I point out that we have gone from 42 workers for every retiree to 3 workers
> now supporting every retiree, with the burden ratio getting progressively
> worse as people live longer. The Wall Street Journal today reported
> that on average, "unionized companies [in the steel industry] support 600,000
> retirees, or SEVEN RETIREES FOR EVERY ACTIVE EMPLOYEE [emphasis mine],
> which makes it nearly impossible to make money in this current era of 
>super-low
> steel prices and stiff foreign competition." No wonder Leo Gerard
> is forced to seek "protectionist" help from President Bush.
> (Those of you who advise Leo Gerard should acquaint him with the "Kelso
> alternative" (i.e., Capital Homesteading agenda and VBM) as something he
> and his top thinkers might want to consider for the future growth 
>revitalization
> of democratic trade unionism.)
> 
> The same mindset over fixed entitlements and security pervades the unions
> at United Airlines as was recently reflected in a remark to me by one of
> the top advisers to Leo Gerard of the Steelworkers. He stated that
> he would be against trading in a VBM-structured ESOP for a defined pension
> plan, even if necessary to save the company from closing and leaving thousands
> of workers jobless. (At South Bend Lathe in 1975, 500 USW members
> saved their jobs by "freezing" vested rights in their pension plan and
> using future employer contributions to pay off the buyout loan that saved
> the company. While this "voting passthrough" ESOP was imperfect because
> of a similar mindset by USW officials, the model would have worked if the
> USW took some time to think about the VBM alternative. The same can
> be said today for those in leadership positions in the unions at United.
> All it takes is the guts to be open to new ideas on how to deliver genuine
> economic justice to working people.
> 
> Norm Kurland
> 
> Center for Economic and Social Justice
> 
> Web site: http://www.cesj.org
> 
> 
> 
> Dan Bell wrote:
> 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
> 
> >
> 
> >
> 
> >--------------------
> 
> >Improved archives!
> 
> >
> 
> >Searching Chicagotribune.com archives back to 1985 is cheaper and
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> 
> >than ever. New prices for multiple articles can bring your cost down
> to as
> 
> >low as 30 cents an article: http://chicagotribune.com/archives
> 
> >
> 
> >
> 
> --
> 
> 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