Why Esop Deals Have Slowed To A Crawl

Few executives seem comfortable sharing power with employees

In the 1980s, employee ownership looked like an unstoppable wave. Thousands of companies rushed to put stock into workers' hands to ward off takeovers, gain tax breaks, or respond to a conviction that employees with a stake work harder and smarter. The 1994 United Airlines Inc. buyout pushed the trend to a new level, as unionized employees purchased control of one of the nation's premier companies--not to fend off a looming disaster but to take control of their destiny.

Now, the surge of so-called people's capitalism is ebbing. From 1988 to 1993, the number of employees at companies with employee stock-ownership plans (ESOPs) climbed only 11%, to 10 million, according to the National Center for Employee Ownership in Oakland, Calif. By contrast, in the prior five years, the number of employee-owners had soared 66%, to 9 million.

For one thing, takeover fears have abated, and fewer executives are rushing to put stock into employee hands. And Congress has whittled away at the tax breaks for ESOPs, reducing their advantage to companies over 401(k)s and other retirement vehicles.

RESENTMENT. More important, employee ownership has run into management resistance, at least at big companies. At first, many executives thought passing out stock would motivate employees and boost performance. But evidence shows that, to be effective, ownership has to be combined with ground-floor efforts to involve employees in decisions through schemes such as work teams and quality-improvement groups. Many companies have been doing this, of course, including plenty without ESOPs. But employee-owners often begin to expect rights that other groups of shareholders have: a voice in broad corporate decisions, board seats, and voting rights. And that's where the trouble can start, since few executives seem comfortable with this level of power-sharing.

A decade after their emergence, many early icons of employee ownership have run into problems ranging from smoldering employee resentment to outright labor-management warfare (table, page 102). "Most of the early examples of large employee-owned companies have failed to create a true ownership culture," says Joseph R. Blasi, a management professor at Rutgers University and an ESOP expert. "Management is unwilling to let employees exercise normal shareholder rights."

Just look at Weirton Steel Corp., one of the most visible early experiments in employee ownership. In the 12 years since workers avoided a shutdown by buying 100% of the company, which is based in Weirton, W.Va., they have swallowed several wage and job cuts and sold a total of 33% of their stock to fund plant upgrades and pare down debt. But in 1994, after then-Chief Executive Herbert Elish had spent lavishly on a $550 million modernization plan, the ESOP was forced to sell more stock, slashing its voting share to 49%. The 4,500 angry union members blamed Elish and demanded a fourth employee seat on the 12-person board. Privately, they also demanded that Elish depart.

The company has never quite recovered. Elish retired last year, but he got his revenge by handpicking his successor, Richard K. Riederer, the former chief operating officer. Riederer seems determined not to let the union treat him the same way. He has plowed ahead with a lawsuit Elish initiated, charging that a four-hour shutdown of the tin mill last year, amid worries of a poisonous mist of chromic acid, was an illegal work stoppage. The union insists the safety concerns were real.

Meanwhile, Riederer has cut much of the communication with union leaders, says Robert J. D'Anniballe Jr., a board member and legal counsel for the union. Complains union president Mark Glyptis: "You would hope that you could sit down and reasonably discuss issues and resolve them." Riederer declined to discuss the problems because, as Weirton spokesman John F. McMahon says, "we don't consider ourselves an ESOP company anymore."

Employee ownership is buckling at Northwestern Steel & Wire Co., too. Unions gave pay cuts to stave off disaster at the Sterling (Ill.) steelmaker--taking 59% of the company and half the board seats in a 1987 ESOP. The company flirted with bankruptcy again in 1992, forcing the 1,800 United Steelworkers members to cut their stake to 16% and sell the rest to new investors. The union has been warring with management ever since.

Recently, relations hit a new low after the company built a lower-wage plant in Hickman, Ky., and refused to grant recognition to the union. Meanwhile, Northwestern laid off 30 employees in Sterling. Angry union leaders confronted CEO Robert N. Gurnitz last fall and gave hostile speeches at the January annual meeting. "Gurnitz is trying to get away from the union by going to Kentucky," charges Art Gillihan, president of USW Local 63. Gurnitz denies this is his intention. "Obviously, we have issues we differ on now, but so does every family," he says.

Employee input has become a problem in a different fashion at Publix Super Markets Inc. The Lakeland (Fla.) chain is the nation's largest ESOP company, with 97,000 employees owning 44%. Founding Jenkins family members hold the rest. The most troubling issue: a pending sex-discrimination suit filed by 12 female employees and backed by the Equal Employment Opportunity Commission alleging that Publix keeps women out of managerial jobs.

Pat Johnson, one of the dozen women, was promoted to deli manager after four years but has been stuck there for the past decade. She and other plaintiffs want their suit certified as a class action on behalf of Publix' 50,000 female workers. Publix denies systematic discrimination and argues that certifying the case as a class would, in effect, force female Publix workers to sue themselves--since they're part-owners. But to Johnson, the issue is control. Even with ownership, "we still have no say in the company," she charges.

Decision making is becoming an issue at Avis Inc., as well. Management set up a 100% ESOP in 1987, then sold 29% to General Motors Corp. in 1989. At first blush, the Garden City (N.Y.) car-rental agency appears to be a model of employee involvement. Workers attend monthly meetings in 150 locations, looking to solve local problems and improve quality. Many employees seem pleased with the process, and Avis scored just ahead of Hertz Corp. on a new J.D. Power & Associates Inc. rental-agency customer-satisfaction ranking.

"NOTHING HAPPENS." Still, workers complain they have no board seats or voting rights, according to the Teamsters union, which represents one-third of Avis' 14,000 employees. Their concerns have been fueled by the company's poor performance, which cut the stock from 22 in 1992 to 12 1/2 now.

"We've asked [CEO Joseph V.] Vittoria why there are no employee reps on the board, but nothing happens," says Sharon Martin, a 30-year veteran counter agent who is a union steward at the Detroit Metropolitan Airport. "It's the same old group on the board that was there before the ESOP." Vittoria says he has nothing against employee board seats: In fact, United Airlines' nonunion salaried employees appointed him to the carrier's board. But at Avis, he says, "it's not necessary, because employees have confidence in us to deal with [major corporate decisions]."

Most executives at ESOP companies seem to share his view. Employees own an average of 13% of their companies at 562 public companies, says Blasi of Rutgers. Yet employees have board seats at fewer than a dozen of these companies, and most of those are unionized.

Employee ownership is by no means a dead letter. It continues to thrive at small private firms, experts say, in part because worker-input issues are easier to handle on a smaller scale. And United may spark new interest in the idea--as long as it continues to be a success. But the early vision of ESOPs as models of participatory capitalism seems to shine a little less brightly today.

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