Exiting Stage Left

By Eviatar, Daphne | Newsweek International, March 17, 2003 | Go to article overview

Exiting Stage Left


Eviatar, Daphne, Newsweek International


As United Airlines struggles to dig its way out of bankruptcy, there's a lingering suspicion that the world's largest airline was undone by an un-American experiment in socialism. Even analysts in Europe, the origin of all troubles started by Karl Marx, have traced the travails of United to the fact that it is also America's largest employee-owned company. No one has stated the case more plainly than Gordon Bethune, CEO of rival Continental Airlines, who once commented that "the inmates have taken over the asylum and broken into the pharmacy."

It's a mistake, however, to assume that there is anything nuttily progressive or "European" about United. Its experiments date back to early-20th-century efforts by American industrialists to prevent European socialism from reaching U.S. factories by distributing stock to employees. The movement waned with the crash of 1929, and later was revived by a farsighted investment banker, Louis Kelso. In 1974 Congress created the first in an increasingly generous set of tax benefits for employee stock ownership plans (ESOPs), of which United is now the most infamous example.

These U.S. plans do share one key goal of European schemes for worker ownership: by allowing employees to share in good times, they are designed to encourage sacrifice in downturns, thereby quieting, even ending, the cyclical war of workers versus bosses. In fact, since the mid-'70s, ESOPs have both raised productivity and staved off the advance of unions in thousands of small to medium-size U.S. firms, if not at United. The Chicago-based giant was more dysfunctional than other ESOPs from the start, but that hasn't stopped its bankruptcy from reinforcing old suspicions. The National Association of Managers is not against employee ownership, says spokesman Darren McKinney, but "the old Stalinist Soviet Union is certainly a textbook example of inefficiency and things that go wrong when you have too much employee control of the workplace."

Most ESOPs are passed down by founding owners who lack heirs and so sell the company to their workers instead. In short, these sales tend to occur in a niche market of felicitous circumstances, free of labor strife. Only 5 percent of the 11,000 employee-owned U.S. companies are unionized, and most have between 200 and 300 employees. In contrast, United was on the brink of financial disaster in 1994, when a majority of its 70,000 employees offered to buy the company in the midst of brutal contract negotiations, hoping to minimize the cuts that were sure to come.

Officially, United says worker ownership has "nothing to do" with its troubles, but that's a bit too sweeping. At best, the buyout did nothing to ease labor strife, and arguably made a bad situation worse. The new worker-owners were asked to take a 15 percent pay cut, followed by further cuts and a steady fall in the value of their 55 percent stake, which they can't sell before retirement. The unions have been fighting for years to get back what they lost in the original deal, scrapping with both management and the one union that balked at the buyout, the flight attendants. At one point the president of the pilots union told management: "We don't want to kill the golden goose. We just want to choke it by the neck until it gives us every last egg."

This is far from a socialist utopia. In general, European labor deals have given workers power in the form of "works councils," which negotiate and consult with management.

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