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. These are so popular, the European Commission recently declared that all companies with more than 50 employees must create works councils by 2008. In the United States, employee-ownership plans typically give workers stock in the company, but not power. United has created the worst of both worlds: giving labor an ownership stake but without financial gain, and just enough power to become an obstructive force.
United’s buyout deal was unusual in the United States, because it did give workers a degree of real clout, with three of 15 seats on the board. They used those seats to fight for wages and benefits, and could also veto candidates for CEO, which made it “very hard for any CEO at United to tell the truth, or any version of the facts that labor leaders didn’t like,” says Michael E. Levine, a former airline executive who now teaches at Yale Law School. It’s no surprise United’s labor costs are now the highest in the industry; for example, its flight attendants get 51 days of vacation per year, compared with 37 days for their peers at Continental, which has been through bankruptcy downsizing twice. Facing its own bankruptcy-court negotiating deadline next week, United management is pushing for $2.6 billion in union concessions, aiming to cut labor costs by one third.
It doesn’t have to be this rancorous. Under CEO Gerald Greenwald, there was a post-buyout burst of enthusiasm for worker-management cooperation at United, but it quickly gave way to antagonism as usual. “United blew it by not building a more consensus-driven airline or decision process,” says Joseph Schweitermann, a management professor at DePaul University and former United executive. “It could have run the airline more as a democracy.”
If this smacks of quasi-socialist claptrap, consider the success of Southwest Airlines. It is part-owned by workers, who hold a 13 percent stake, and is the profitable exception to the post-9-11 depression in the airline industry. “At Southwest, their credo is: employees first, customers second, shareholders third,” says Corey Rosen, executive director of the National Center for Employee Ownership. “It’s a very employee-centered place to work.”
Its advocates insist employee ownership is a quintessentially American idea. The 11,000 employee-owned companies represent a tiny fraction of U.S. companies, but studies show company sales tend to grow 2 to 3 percent faster after the employees take over, and up to 11 percent faster if stock ownership is combined with an effort to bring workers into management, says Rutgers University sociologist Joseph Blasi. Why? Workers know the plant, and are well positioned to increase efficiency if they have an incentive to do so. In 1848, English philosopher John Stuart Mill predicted that worker-owners would outperform industrialists, because they would not have to fight class wars, and Mill is an adherent of free-market theory. Yet the suspicion of employee ownership as socialist daydream remains. “There’s still a great fear that employees are incapable of being shareholders and wage earners at the same time,” says Blasi. “Employee ownership is pure capitalism. It makes everybody a capitalist by sharing ownership with them.” It may still have a bright future, even if United does not.
