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Briefing Papers give quick, one-page summaries of several of the ideas in this article.


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Article: Employee Ownership and Industrial Relations

Christopher Mackin, Ed.D., President
Ownership Associates, Inc., Cambridge, MA
Published in Perspectives on Work, Madison: The Industrial
Relations Research Association
, Vol. 1, No. 1, April, 1997, pp. 66 - 69.

In July of 1994, 55,000 employees at United Airlines assumed majority ownership and substantial governing influence over their company. That one transaction and two and one half years of results that have followed from it seem to have made a difference. While results at United are complex and include recent (January, 1997) contested contract negotiations concerning how to share the company's apparent success, it would be difficult to dispute the overall positive profile of the United experiment to date. Anchored by a national print and television advertising campaign featuring United employees announcing to the traveling public that "we don't just work here," United has aggressively promoted their new circumstances. A March, 1996 Business Week cover story, reported the first measurable consequences of employee ownership. Operating revenue per employee in 1995 had jumped by 10% versus gains of 8% and 7% at American and Delta respectively. United stock, which traded at $88/share at the time of the transaction currently trades at nearly triple that price, taking into account a 4:1 stock split in early 1996. Unlike competing carriers, that have relied heavily on retrenchment to achieve their recent gains, United achieved theirs with an expanding job base. In an era of dramatic downsizing, during which executives at AT&T have been simultaneously propagating an 'end of jobs' economy, United has been hiring -- adding 7,000 new employees since the buy-out.

Perhaps the strongest piece of evidence to support the new found visibility of employee ownership since the arrival of United however has recently materialized via the pen of that noted scourge of utopian thinkers, George Will. In a December 5, 1996 nationally syndicated op-ed column entitled "A new chapter in capitalism", Mr. Will admiringly quotes both union and management leaders at United and ventures the thought that employee ownership of private enterprise could herald "a promising new chapter in the history of capitalism ... [that could] ... diminish some of the forms of social strife that have fueled modern liberalism."

Evolution of ESOPs

There is much that is new about employee ownership. But it is also a field that contains large internal differences and an intriguing and colorful history which is useful to understand. It is a little known fact, for instance, that there have been two distinct epochs of employee ownership experience in the United States. The first took place in the late nineteenth century and was strategically led by two pre-AFL-CIO national labor organizations, the National Labor Union and the Knights of Labor. A second, contemporary epoch dates back to the 1974 passage of the Employee Retirement Security Act (ERISA). That law included guidelines for establishing the first ESOP's or employee stock ownership plans in American corporations. ESOP's are a specialized form of pension plan, referred to as a defined benefit contribution plan, which invest primarily in employer securities. Today approximately 10 Million workers working in 10,000 American companies, participate in the ownership of their corporations through ESOP's.

A quick review of the historical record shows that George Will is not the first commentator to imagine the large potential of the employee ownership idea. In a speech to his membership in 1872, William Sylvis, the President of the National Labor Union, boldly touted employee ownership (the term then was "Cooperation") as "an alternative to the wages system." Sylvis, who spoke at a time when the transformation from an agrarian to an industrial economy had begun in earnest was explicit in his apprehension about the kind of employment relationship the industrial capitalist alternative offered to working people. "So long as we continue to work for wages, he argued, so long will we be subjected to small pay, poverty and all of the evils of which we complain". At its peak, the American cooperative movement boasted of more than 200 democratically owned shops in approximately 35 trades from iron moulding to shoe manufacture to barrel making. Lacking adequate capital resources to compete against larger employers, the industrial cooperative movement, chronicled by labor historians such as John Daniels (1938) and Gerald Grob (1961) faded from the scene by the turn of the century.

The second, contemporary employee ownership epoch can be traced to the cloakrooms of the United States Senate where in 1974 Senator Russell Long, the moderate and now retired Democratic son of the populist legend of Louisiana, Governor Huey Long, succeeded in persuading his colleagues to adopt the first of several waves of tax incentives in support of ESOP's. As chairman of the Senate Finance Committee, Senator Long enjoyed considerable political leverage to be able to push his agenda through the Congress. By use of tax code and in a manner decidedly more appealing to the business owning classes, he aimed to realize at least some of the same redistributive visions of his father's New Deal era "Share the Wealth" clubs. Instead of "forcing" the wealthy to surrender their assets through confiscatory taxation, Senator Long and his policy advisor Louis Kelso's prescriptions were to induce the gradual transfer of the economy's wealth making machinery by encouraging business owners to sell their businesses to their workers. The result, Senator Long imagined, would be an enlightened and peaceful process of economic reform, a non-confrontational ushering in of an era of "democratic" capitalism that could be functionally competitive while also addressing the economic inequalities that had troubled his populist father.

Senator Long's vision may be far from being realized but even prior to the appearance of United Airlines it had begun to extend to a rich mixture of American corporations concentrated in manufacturing and professional service sectors. Few of these companies are household names. Most are healthy, stable, small to mid-sized, non-union, privately-held corporations like 200 employee Fastener Industries of Berea, Ohio, a supplier to the automotive industry, who have been faced with an ownership succession problem and been attracted by ESOP tax incentives. By selling company stock to an ESOP and reinvesting the proceeds in American securities, business owners like those at Fastener have been able to defer the payment of capital gains taxes that would follow from a liquidation or a more conventional sale to a competitor.

In the unionized sector there have been other motivations at work aside from tax incentives. The leading such motivation, particularly in the steel industry, has been saving jobs. Weirton Steel of Weirton, West Virginia, and Republic Engineered Steel, of Massilion, Ohio, are two prominent examples of ESOP's where wage and work rule concessions have been traded for stock in order to provide competitive relief to a troubled employer. In 1987 the AFL-CIO passed a formal resolution that encouraged selective use of this technique of collective bargaining and published guidelines for its affiliates to use in negotiating the specific terms of ESOP transactions. Since then individual unions and the AFL-CIO itself have developed sophisticated in-house capabilities to evaluate ESOP transactions and have characterized their use of ESOP's as "investment bargaining" rather than the granting of unrecoverable concessions to individual employers.

Not all ESOP investment bargaining takes place in dire circumstances. The United case, for example, can be distinguished from earlier transactions in steel by virtue of the relative health of the airline industry. The United transaction was also intensively planned. An ESOP was the deliberate choice of the participating labor organizations, most notably the Air Line Pilots Association. While both labor and management at United looked to ESOP investment bargaining as a source of competitive relief from lower cost carriers such as Southwest, economics was not the only or even, from a labor perspective, necessarily the most important consideration.

Employee Ownership at United Airlines

The Air Line Pilots Association and eventually the International Association of Machinists at United also looked at the installation of an ESOP as an opportunity to 'break out of the box' of conventional collective bargaining in order to be able to influence the selection and oversight of corporate management. As a condition of their purchase, the Air Line Pilots and the International Association of Machinists received representation on United's Board of Directors and were able to replace the United senior management team. Jerry Greenwald, the new Chairman and CEO of United and John Edwardson, the President and COO were the actual positive, new choices of the union groups whose executive qualifications also met with outside shareholder approval.

United is also an unusual example of a "hybrid" private/public corporation where employee ownership which comprises 55% of outstanding stock co-exists with public shareholding at 45%. As a result, the interests of United's participating unions are at least theoretically aligned with those of its outside shareholders. By virtue of their status as majority shareholders, however, United employees enjoy a privileged position, one which insures their involvement in critical strategic decisions facing the company. Not only do workers, through their unions, sit on a corporate Board of Directors alongside such esteemed business leaders as former Federal Reserve Board chair Paul Volker to deliberate important matters of the day. Workers as a whole at United sit atop a combined 55% of United's net worth -- as of this writing a value in excess of $500 million dollars.

United is not without its problems. The most persistent of these involves the relationship between the company and the Association of Flight Attendants (AFA), representing nearly 16,000 employees. The AFA membership has yet to join the ESOP both due to concerns about the cost of concession/investments that would be required and to significant policy differences with United management about the staffing of new overseas domiciles with lower paid, less senior AFA members.

On another front, a recently negotiated mid term wage agreement with the Pilots Union has been rejected by the Pilots membership by a 4:1 ratio. The Machinists union, with two principal bargaining units for mechanics and baggage handlers respectively, has split in their response to recent negotiations. Mechanics have rejected the recent contract and baggage handlers have accepted. The two rejected contracts now go to binding arbitration as agreed to in the original 1994 ESOP deal.

The current problems facing United are, arguably, the problems both of success and of competing interpretations of the terms of their novel agreement. As United CEO Jerry Greenwald has put it in commenting on their industry leading performance, "no one thought that we would this well this quickly." In a message to all United employees after the setback in negotiations Greenwald first reaffirmed his perspective on employee ownership stating "I am 100% committed to employee ownership at United" and then proceeded to state that "if we, as an employee-owned company have failed, I think it has been in the area of underestimating the time it is going to take to complete the journey from the United of the past to realizing the company we all want United to be. For that, I take responsibility."

When considering the general idea of employee ownership, scientific minds appropriately resist the lure of the single case. The attention shown to United should perhaps be more evenly distributed to the field as a whole to answer a range of important questions. Over the past twenty years a modest research specialty has developed in the field of employee ownership. The findings of this research have been largely positive, finding comparative advantages in sales growth, productivity and profitability when comparing employee owned firms that also employ participatory management practices with firms operating under conventional ownership.

Perhaps the most provocative research finding for the present discussion however relates to the apparent relative "staying power" of sales and employment advances in employee-owned firms using participatory management practices when compared to firms that introduce participatory practices alone. It has been observed that the stated cultural, organizational objective of most high performance, participatory work organizations has been to help create a psychological "sense of ownership" among employees, without actually transferring any "real" ownership rights or privileges. Research by Kardas (1994) in the state of Washington however has found 5% higher sales growth and 13% higher employment growth in participatory, "high performance" ESOP firms when compared to participatory "high performance" firms without employee ownership. This finding suggests that workers are able to make a critical distinction between "psychological" and "real" ownership and, controlling for other variables, will hold out their highest performance for workplaces which traffic in the real thing.

Critics of ESOP's often point out that the "real" thing that this recent research seems to find is often times not real enough. They point to the provisions in ESOP legislation that permit owners of privately-held companies, which constitute the statistically dominant ESOP company form, to withhold voting rights on all but a few key shareholder issues, thereby creating ownership without sufficient voice. This criticism, absent in publicly-traded companies and in most companies where workers enjoy union representation is legitimate. A combination of research evidence supporting the superior performance potential of participatory employee ownership and a relatively open debate within the ESOP field may, however, be gradually tilting ESOP practice in a more participatory direction. ESOP advocates who are willing to accept the legitimacy of this criticism resist the idea of mandatory regulations stipulating how participation and voting should necessarily proceed. They argue that the best pressure for change will come from within the field itself as managers and owners learn from their peers and from the research evidence that greater workplace democracy is not inconsistent with organizational efficiency and bottom line results.

The Redistribution of Wealth

A final and relatively unambiguous challenge which the field of employee ownership may be ready to present to the field of industrial relations however returns us to William Sylvis' and Senator Russell Long's concerns with the distribution of wealth in society at large. At the conclusion of a year when advances in stock prices in the American economy have created enormous wealth for shareholders, it is appropriate to ask how that wealth should be sensibly shared. The argument that American workers have participated in this market upswing through various pension vehicles, primarily through defined benefit plans as well as defined contribution plans such as 401k vehicles is largely a distraction. The facts are that shareholding and wealth is radically concentrated in American society and is not being substantially reversed by indirect forms of pension ownership which, in any event, do not bring with them the kinds of employee influence over corporate governance found particularly in the unionized sector of employee-owned firms.

In addition to redirecting wealth to those primarily responsible for producing it within the firm, employee ownership of corporations also introduces a transparency to the wealth producing process. Appropriately structured, it connects collective efforts with collective results. If there is a tonic effect which employee ownership will bring to the industrial relations conversation, it may well be found not only on the level of its utility and performance characteristics relative to other forms of workplace innovation, but also in its capacity to challenge an accumulation of more fundamental assumptions about the nature of the employment relationship and the structure of the modern corporation.

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