Most of the articles in this column describe how companies are making employee ownership a competitive advantage. Typically, the authors write about the lessons learned by dynamic companies where employee-owners are passionate about making their companies succeed.
But these days, the spectacular failure of a prominent ESOP company, United Airlines, is making the public, the commentators, and even some employee-owners wonder if ESOPs are such a good idea after all. You'll hear people talking about the risks of ownership, the dangers of too much power in the hands of workers, and how most people simply aren't mentally prepared to be owners.
There are good responses to all of those concerns, and this article will cover some of them.
Does the United Airlines bankruptcy show that ESOPs are a bad deal?
No. It is true that many employees at United Airlines now own stock that is worth much less than what they gave up (wage, benefit and work-rule concessions) in 1994. But United Airlines is one company, and thousands of companies have adopted ESOPs since ESOP law was first passed in 1974. Look at the general trends for all ESOPs and you'll find tens of thousands of stories: those stories probably don't make for good headlines, but they do make good retirements.
Based on a 1998 study from the state of Washington, employees in ESOP companies have retirement assets that are approximately 150% greater than non-ESOP participants,. In other words, the average retiree from an ESOP company will have approximately 2½ times as much to spend during his or her retirement than the average non-ESOP participant. (For more information about this research, see "Show Them the Money," by Adria Scharf, The ESOP Report, November / December, 2001, p. 3.)
Does United Airlines show that ESOP participants have risk?
Yes! ESOP participants do have something to lose if the value of their companies' stock value declines. That's part of what "ownership" means, and it's a mistake to deny that this risk is real. People won't really feel or act like owners if they don't know about their own risks. Companies can't begin taking the first steps to a strong ownership culture without trust, and nothing destroys trust as quickly as keeping a secret. (See Who's Afraid of Ownership?).
So there is a risk that comes with ESOPs, but let's put it in perspective. ESOP participants are taking risks, but in 97% of cases they're taking risks with assets that wouldn't be theirs to risk if it wasn't for the ESOP. Plus, the odds are stacked in their favor. ESOP companies perform better than non-ESOP companies. ESOP companies file for bankruptcy less often than non-ESOP companies. And ESOP companies are purchased by outsiders less often than non-ESOP companies.
ESOPs do not make companies more risky, but they do expose employees to risks they didn't have before. That risk is part of being an employee-owner.
How is United Airlines different from other ESOP companies?
In lots of ways: United is a huge company that employed nearly 100,000 people at its peak. It has multiple centers of power: management, multiple unions, and shareholders. Unlike the vast majority of ESOP companies, United Airlines began its ESOP with bad news: wage concessions by all ESOP participants. It is publicly traded, which adds a whole set of regulations. It is in an industry that is normally among the most turbulent in the U.S. economy-airlines were struggling even before the attacks of September 11.
The effect of all these factors is important, but this column is about ownership culture. United Airlines began its employee-ownership phase with a strong focus on culture, but that didn't last. United could have learned some lessons from the companies highlighted in the Ownership Advantage columns.
What are some of the lessons United Airlines could learn from other ESOP companies?
1. Ownership Vision
Vision is knowing what ownership means in practice at your company. The companies we've worked with have found that the best way to be clear about the vision is to determine what rights employee-owners have, and what responsibilities go with those rights, but there are other ways to put an ownership vision together.
There is evidence that apart from a brief flurry of activity during its early years (1994-96) neither the unions that initiated the United ESOP or management invested the time and energy necessary to fill out the promise of employee ownership. . And without leadership from the unions or management, the United ESOP was fated to become what it is now--an oversized target for organizational cynics who wish to return to the glory days when employees stayed out of management issues.
Many ESOP companies, by contrast, do take the time to create a vision of what ownership means for employee participation. Come to an ESOP Association conference, and you'll find companies like Woodward Communications, which has put answers to people's questions about what the ESOP means into a fold-out card that fits in a wallet. Or read the article "Sharing the Knowledge / Creating the Wealth" by Carolyn Zimmerman, in the November, 2002, issue of The ESOP Report for an excellent overview of how to do the strategic planning a company needs in order to develop a clear vision.
2. Use Teams
At first, United Airlines did use teams-and they worked! Cross-functional taskforces and BOB ("Best of Business") teams saved the company substantial amounts of money. Our company, Ownership Associates, worked with United in those early years, and we could see the changes in the way people acted toward each other and toward customers. Those changes were also reflected in the numbers: for example, revenue per employee was up 10%, and employee grievances were down 74%.
But without clear support from the top in both labor and, particularly, from 1998 on, in management neither the teams nor the enthusiasm lasted. ESOP Association member companies have lots of experience with building effective teams and keeping them active and effective for the long term. For some of what they've learned, look at "It's About Time to Put the 'I' in Team" by Jim Bado (the December, 2002, issue of The ESOP Report, p. 3).
3. Respect Middle Management
Just after United Airlines's ESOP was put in place, a new CEO and a new #2 management official were brought into the company at the invitation of the unions and with approval of the company's Board of Directors, specifically because they supported employee-ownership. The problem was that, when it came to employee-ownership, most of the rest of the management team had no background, no interest, and no reason to care. Without consistent pressure from the board of directors or senior management about how to manage in an ownership environment, these managers continued to stick to old habits and the culture of ownership suffered as a result.
Some people blame middle management for this failure, and they may have part of the responsibility, but middle managers are in an almost impossible position unless key company leaders provide them the vision, training, tools and support they need to support a new culture. Failure to get middle managers on board is a common problem in ESOP companies-our research has found that middle managers are more likely to be cynics than any other type of employee. Since they are the ones who are the "face" of the company to most employees, this cynicism is a major hurdle slowing down ownership culture development.
United could have done what Carris Reels did. We worked with Carris to help them design and implement participative management using a participative process. The process took some time, but it involved people at all levels of the company, and the clarity it creates helps neutralize much of the fear of the unknown that makes life difficult for middle managers. (See "Employee Owned and Governed" by Loren Rodgers, in the March, 2001, issue of The ESOP Report.)
4. Make Ownership Part of the Message
Ownership changes the relationship between employee and company, and that change should be reflected in the company's communication, internally and externally. At United, it started that way. You may remember the "Fly Our Friendly Skies" television ad campaign, featuring the faces and voices of United's new owners. You may also remember the subsequent campaign: "Rising" that had no hint of employee-ownership. This decision to drop ownership from the image they projected to the traveling public was evidence of the degree to which ownership was being neglected at United Airlines.
5. Manage Expectations
Whether people are satisfied with employee ownership depends on perceptions and expectations. If what they believe the company is doing differs from what they think the company
Employees at United had the expectation that they were gaining a degree of influence over the company, and that they'd be consulted as partners when major decisions were faced. That expectation was supported the first time United considered buying USAirways, but the second attempt was largely conducted behind closed management doors, with the employees voiceless. This shattered employee expectations of being respected as full partners with management, and led to defensiveness and inflexible bargaining positions in the last few years.
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One of the architects of the ESOP, Captain Rick Dubinsky of the Pilots union at United, used a vivid metaphor to describe the United ESOP. He described it as an oversized $4.88 billion dollar gift, fitted with a red ribbon, that had been sitting in the center of an extremely large stadium surrounded by 85,000 participants. In the seven years that had passed since it had been delivered to the stadium, no one had figured out how to untie the ribbon and open the box.