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(KRT) - UAL Corp.'s bankruptcy filing signals an end to perhaps the nation's greatest employee ownership experiment.

Although the Elk Grove, Ill., Township-based airline stopped making contributions to its vaunted employee stock ownership plan two years ago and the shares were reduced long ago to a tiny fraction of their peak value, the bankruptcy filing has important symbolic value that resonates through the world of ESOPs.

Employee stock ownership proponents say the downfall of UAL - the nation's second-largest ESOP, after Publix Supermarkets - does not represent a fatal flaw in the system. Nor, they say, will it serve as a catalyst to dramatically change that system.

Not only can ESOPs work, they insist, but research suggests companies with ESOPs tend to perform better than their peers - although it's not necessarily the ESOP itself that matters most, but the circumstances under which it began and how it is implemented.

"Employees do a lot better, typically, in ESOPs, and companies perform better," said Corey Rosen, executive director of the non-profit National Center for Employee Ownership, which researches ESOPs and other employee ownership issues.

Indeed, experts said UAL illustrates the risks of ESOPs created under duress, but it is the exception, and likely to have little effect on the future of ESOPs.

But it's not alone.

Years before UAL Corp. workers were faced with a similar situation, union workers at Northwestern Steel & Wire Co. agreed to pay cuts in 1987 to try to resurrect the Sterling, Ill., company. In exchange, they received a majority stake in the company through an employee stock ownership plan.

Like the UAL plan, the Northwestern Steel & Wire ESOP fared well for a time, and some union members retired with tidy sums when they were allowed to cash in their holdings. But, also like UAL, things eventually turned sour: The steelmaker needed more capital, reducing the employees' stake, and then filed for bankruptcy in 2000 - ultimately going out of business - leaving the workers' holdings worthless.

"I've just never seen an ESOP work," said local United Steelworkers official Russ Lovell, who opposed it from the start. "I didn't believe in it then - I told folks we weren't going to have anything at the end of the day."

Other big-name companies that had ESOPs, including Polaroid and Weirton Steel, have gone to bankruptcy court before UAL and created little more than a ripple. And the explosive growth of ESOPs in the 1980s - often launched, like Polaroid's, to deter takeovers - leveled off a decade ago at roughly 10,000 companies, only about 10 percent of them publicly traded.

An estimated 11.5 million U.S. workers are ESOP participants. Under the typical public ESOP, a company purchases a block of its stock, often by borrowing money, and distributes the shares over time to workers. In some ESOPs, including UAL's, workers are guaranteed spots on the board of directors.

For companies, ESOPs offer tax advantages, and recent tax law changes will encourage even more ESOPs, experts said.

For workers, the shares can be a bonanza if the company thrives. But, because ESOP laws allow firms to prevent workers from diversifying their holdings until age 55, the shares come with added risk, as UAL workers learned so painfully.

Rosen said companies with ESOPs are more likely to have separate defined-benefit pension programs - as UAL did - which cushions the blow if the company fails.

Proponents say ESOPs can improve productivity and company performance, but experts quickly add that is more likely to occur with organizational improvements, a culture in which workers feel a sense of ownership and shared values and goals between employees and management.

And that may have been the downfall of UAL's ESOP.

"When firms are struggling and then decide to do an ESOP, there is usually trouble," said Hamid Mehran, a former Northwestern University professor who has studied ESOPs.

Rosen noted that UAL's ESOP was unusual to start with, because most don't require worker concessions, and it was set up to halt contributions after five years, which signaled a lack of commitment from the start.

"Decisions get made ・which might benefit the interest of employees but might not be in the best interest of the company," said Mehran, an economist at the New York Federal Reserve Bank.

"ESOPs in my view are a good thing, but if a company is in distress, it's not a solution to poor management."

Because United's ESOP was unlike any of its brethren, it is unlikely to drive much change at other companies, said Jared Kaplan, a national ESOP expert and partner with McDermott, Will & Emery in Chicago.

"United's ESOP emerged out of a desire by the pilots to get control of the company, and it didn't really even do that," he said.

For a time, when shares were above $100, the ESOP looked brilliant, Kaplan noted.

"It was a great experiment that over the short term looked like a great success," he said. "Of course, it would have been nice to predict Sept. 11 and the economic downturn. In hindsight, it didn't turn out well, but I don't think you can draw lessons in general from an ESOP so unusual as United's."

That's why, experts said, many workers concerned about the lack of diversification in ESOPs shouldn't look to Congress for relief.

The saga over Enron Corp. employees losing their retirement savings has inspired calls to allow workers to diversify.

Although many initial proposals in Congress would have included all ESOPs, a bill that passed the House this year covered only those public company ESOPs linked to a 401(k) plan. That measure died in the Senate, but President Bush and Republican leaders are expected to quickly push a version similar to the House bill when the new Congress convenes next month.

The UAL situation, several experts said, is unlikely to lead to any substantial revisions.

ESOP proponents launched an aggressive lobbying campaign to limit changes to ESOP laws, and said they are comfortable with the House bill. They received a boost from this fall's stock market drop, which illustrated that all retirement plans, not just those at the Enrons of the world, are at risk.

"Oddly enough, it took the pressure away from the idea that the big driver in our retirement savings was company stock," said J. Michael Keeling, the president of the ESOP Association, a Washington-based ESOP advocacy group.

But others are less enamored with the current climate, and say Congress should step in.

J. Mark Iwry, former Treasury department benefits counsel, said ESOPs can play a constructive role in boosting employee morale and productivity, but an overly concentrated retirement plan is unduly risky.

"Up to a point, employee ownership a good thing, but too much of a good thing can be unhealthy, specifically when workers' retirement security depends on the stock of a single company," Iwry said.

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