Re: United ESOP highlights a problem

[Norman Kurland <thirdway@cesj.org>]

Dan Bell wrote:

Norm,

I agree that employees should have direct control of the companies
they own through ESOPs.

Dan, I know we agree on many aspects of ownership policy, including the
right of worker co-owners to enjoy direct shareholder rights and voting
powers on the shares they own through ESOPs.  My point is goes beyond
shares that have been acquired.  More specifically, I think that everyone
interested in a more just, more democratic and more productive economy
should make widespread access to future co-ownership opportunities the
highest priority on their agendas, higher than 20th century bargaining
over "wage system entitlements" that have proven to be counter-productive
in the globalization and one reason American unions have lost so many members
in the private sector.  In other words, we need a clearer, bolder
and more realistic long-range vision for the 21st century worker rights. 
Are we together on that?
> Regarding defined benefit plans, the OEOC never recommends
> to an
> employee group that they exchange a good defined benefit plan for
> an ESOP.
I agree that the economy must meet its retirement promises to all retired
workers.  And under our Capital Homestead Act and our "Saving Social
Security" proposals, those promises would be met.  However, I don't
know how you define a "good" defined benefit plan.  To me, that's
like a "good" pay-as-you-go Social Security System.  They both work
as long as companies are making high profits and the economy is healthy
and growing.  They're both inflexibly structured on promises that
cannot be kept if people live longer, the economy declines or those industries
that make pension promises are no longer cost-competitive in world trade. 
During the last 30 years, overall pension payouts for retired workers of
integrated steel companies have continued to rise, and unfunded pension
liabilities are major factors that old-line steel companies have gone out
of business or merged to stay afloat.  When those companies become
most vulnerable because of lower-cost competitors and at the same time
stock prices tumble on pension assets, the companies are obliged under
ERISA to make bigger payments into their pension funds to meet pension
payouts.  This was the lose-lose situation that attracted corporate
raiders in the 1980s to target "rust belt" companies that they could take
over with highly leveraged loans, rape them for whatever assets they could
convert to cash and spit them out when there was no juice left.  This
forced many workers to join unemployment lines and retired workers to turn
to the Pension Benefit Guarantee Insurance Corporation.  Under these
conditions, competitors, generally non-unionized, and more leading edge
industries turned to the more flexible "defined compensation" plans, where
promises are based on front-end realities faced by the company and its
workers, rather than on "back-end" uncertainties and stock market risks
over which the company and its workers have no control.  The 100%
leveraged ESOP, as was accomplished at South Band Lathe, Weirton and Avis,
offered a way for workers push the raiders out of the picture.  The
"defined pension-or-nothing" mindset kept the unions at South Bend Lathe
and Weirton from ever realizing the full advantages of worker ownership
and control.

The bottom-line is that if OEOC policy is never to recommend to workers in a failing company that they trade in or "freeze" vested pension rights for a defined benefit plan, for the kind of comprehensive new "social contract" that we advocate under "Value-Based Management", then OEOC should reconsider its policy.  Under a VBM ESOP the first priority is to accumulate, as much and as soon as possible, maximum ownership powers and profit sharing distribution rights.  The second priority is to use the cash account in the ESOP to receive employer cash contributions beyond that needed to repay the buyout loan to accumulate a diversified portflio, just as a defined benefit plan or a defined contribution plan does.  The difference in our positions is that I am convinced that acquiring ownership power and control over their own destiny is far more important than illusory "promises" of retirement security to the immediate and the retirement interests of workers, their unions, their companies and to the national economy.  I think it's our job to move toward national policies that will make it easier to educate people of the merits of the ownership system over that of short-sighted 20th century labor policies.

> We do not see ESOPs as good core retirement plans,
> we see
> them first as good financial mechanisms for employees to use in
> acquiring their company, and second, as good supplemental retirement
> plans.
I agree that the ESOP is a great tool for workers to acquire the company. 
But it should also be used as the best tool to accumulate diversified assets
for retirement.  It offers all the advantages of a pension plan but
without the disadvantages of "false promises" that could kill the company
and the jobs of those who have not yet retired.

Of course, where saving the company requires freezing the defined
benefit plan during the life of the ESOP loan, sometimes workers have
no other choice, assuming they have a good shot at keeping decent
paying jobs through the sacrifice. We recommend that they reinstitute
a more diversified retirement vehicle once the debt service has been
met.

The fact that one worker supports 7 retirees in the steel industry
is not a condemnation of defined benefit plans, it is a condemnation
of the greed of the owners of the steel industry.

I blame the system and the bad ideas that shape the system, not the "greedy"
owners.  The system can and should be transformed and will be when
better ideas replace bad ones.  I think it's a mistake to try to blame
people for their vices, like greed or envy.  If we restructure the
system to conform to solid principles of economic justice, everyone will
begin to behave better.  To paraphrase Bucky Fuller, "I have no interest
in trying to change human nature.  I just want to change the environment
so that people will behave better and become more successful."

When the steel company owners promised the defined benefits, they
had a moral obligation to set aside enough of their profits to
support this contractual obligation. Many owners greedily milked the
profits for their own consumption.

A case in point is Atlantic Foundry in Akron, Ohio, owned by the Reymann
family. When they discovered in the 1980s that the foundry business
alone did not generate enough profits to pay the obligation to the
retirees, they formed another corporation Citnalta (Atlantic spelled
backwards) and transfered the retained earnings to the other corporation.
Of course, they left the obligation to the retirees to the foundry
company. The capital which through investments would generate more than
enough money to meet the retiree obligation was stolen by the Reymanns.

Then they closed Atlantic Foundry because it "could not afford to support
the retirees".

If the Reymann family violated their funding obligations under ERISA, the
Labor Department and the PBGIC can come after them to rectify the problem. 
If they violated no law, then mobilize enough support to change the law. 
We had far less clout than OEOC has today when we lobbied the ESOP into
formal recognition by the law.
> Around 1989/1990, accounting rules were changed to
> require that the
> future value of retiree health obligations were reflected as a
> liability on the Balance Sheet. Obviously, this shifted value from
> retained earnings to liabilities. If Atlantic Foundry's Balance Sheet
> had been subject to these accounting rules, it might not have been
> so
> easy for its greedy owners to steal its retirees' future.
I agree.

Dan, I repeat that the central issue is "opportunity" versus "security."  Those who seek security at the expense of opportunity are doomed to live miserable lives.  It takes guts to seek opportunity, but that increases the odds that they can enjoy both opportunity and security.  That's the essential message of Kelso.

Here is an e-mail I recently sent out on the Enron situation that has some relevance to the issue of risk underlying the decision of unionized employees to abandon the ESOP at United Airlines.  I hope it will help you and others in the Organized Labor discussion group to better understand the wisdom of Kelso:

---

The problem at Enron starts with management and the Wall Street gambling people hiding their insider's game from ordinary workers at Enron and hyping up the value of Enron stock far beyond its real value.  (The problem became exacerbated when workers had to put up their own money to buy shares through 401(k) plans, rather than on non-recourse, self-liquidating credit as proposed by Kelso or as we propose through personal Capital Homesteading Accounts at their local banks.)  With the auditors at Arthur Andersen in bed with the bad guys and too lazy to uncover the overstated profits of Enron, ordinary workers took on the mindset of speculators, rather than investors.  "Irrational exhuberance" prevailed until the bubble burst.  Greater accountability and transparency through genuine ownership empowerment for all workers and more active policing by unions representing these workers might have minimized these risks.

The risk problem can be dealt with either by diversification, as you suggest, or, better yet, by using Capital Homesteading credit to purchase full-dividend payout shares and covering the risk of declining share values through capital portfolio insurance and reinsurance, as proposed in our Capital Homestead Act.

In 1974, the same arguments as yours on risk were used by Senator Javits to limit the use of company
stock in ESOPs to 10% of trust assets.  If Senator Long didn't intervene, the 100% leveraged ESOPs at South Bend Lathe, Weirton Steel and Avis would never have been born.  And workers and their unions in the future would be unable to take over troubled companies like Enron, United Airlines, US Steel, and Horizon Airlines as I would propose through a VBM restructuring strategy under Chapter 11 bankruptcy proceedings.  Demanding absolute security can be the enemy of opportunity and justice at the workplaces of the world.  In other words, solutions born in panic or excessive risk-avoidance often blind us to structural solutions aimed at justice with risk minimization.

Once a rich person accumulates enough assets, it makes sense to diversify.  But Andrew Carnegie, who certainly followed his own advice, gave the best advice one can offer to the poor man.  He focused in on how one accumulates enough to become rich, when he declared:  "Put all you eggs in one basket, and watch it carefully, and when the eggs hatch, do the same."  And Mark Twain reinforced the wisdom of Carnegie when he said, "Only a fool doesn't put all his eggs in one basket."

Here's what I sent to someone recently who proposed "USA, Inc," an idea similar to yours (except that you add several governance safeguards, including voting passthrough) and Speiser's:

<<USA, Inc.>>

<<Here you have raised a sticky political point, the proper relation of the human person and the state.>>

<<A similar proposal was made in a 1977 book by Stuart Speiser, "A Piece of the Action."   Speiser was inspired by a "60 Minutes" show under that title, on Kelso and our  legislative successes on Capitol Hill.  Speiser wrote a distorted history of our movement, reviled Kelso's theories as an impediment to the goal of universal capital ownership (cowtowing to the arrogant opposition of academic economists like Milton
Friedman and Paul Samuelson) and offering his solution -- putting shares representing all new capital in a single mutual fund (a USOP or "Universal Share Ownership Plan") and paying all citizens a dividend from the USOP.  All voting power would be centralized in the hands of those who ran the fund.  Since the USOP would be designed to distribute "dividends" to all that would be directly linked to productive capital, what's wrong with Speiser's proposal?  Why did Kelso reject it and I considered it politically naive and short-sighted?  Simply because such an enormous concentration of economic power, even in private hands, would eventually become corrupted or result in such controversial policy decisions that the fund would become a highly visible and vulnerable political target and eventually be taken over or controlled by state.  In other words, the wrong approach, though presumably well-intended, would lead to a socialist or communist system, where economic power is even more concentrated in fewer hands than under the Wall Street version of capitalism.>>
 

I hope these comments will persuade you to think again on the issue of risk.

Norm Kurland
Center for Economic and Social Justice
Web site: http://www.cesj.org