Re: United ESOP highlights a problem

[Norman Kurland <thirdway@cesj.org>]

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 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.
  >