United Airlines' crisis marks the latest case of how workers' stakes fall with firms' fortunes
By Beth Healy, Globe Staff, 12/8/2002
First came the collapse of employee stock ownership programs at Enron
Corp. and WorldCom Inc., under the weight of fraud and scandal. In
Cambridge, the failures of 116-year-old consultancy Arthur D. Little and
instant-photography pioneer Polaroid Corp. left thousands of employees
with damaged nest eggs. And now the giant of all ESOPs is in flames, as
United Airlines grapples with bankruptcy and 50,000 of its workers face
the possible loss of some $4 billion in retirement wealth.
The devastation at United comes as no surprise to ESOP specialists. To
be sure, the economy's slump and the drop in travel after Sept. 11 have
taken their toll on the nation's second-biggest airline. But even zealots
of the employee ownership concept, who say stock plans can improve
companies and help workers accumulate savings, say the eight-year-old
United plan was doomed from the start.
''Employee ownership is not a magic solution,'' said Michael Keeling,
president of the ESOP Association, a Washington lobbying group. ''If
you're in a troubled company, employee ownership's not going to make a
silk purse out of a sow's ear.''
There were warning signs even back in 1994, when the ink had barely
dried on the buyout deal that put 55 percent of United in the hands of
pilots, mechanics, and nonunion employees in exchange for $4.9 billion in
wage concessions.
Professors decried the use of ESOPs as bailout tools. Critics attacked
the unorthodox design of the United plan: Without the participation of the
flight attendants - the public face of an airline for many consumers - how
could United be truly employee-owned? And with no plans for permanent
employee ownership, nor the offering of shares to new workers, the plan
was a thinly veiled fix to save a sickly organization, analysts said. Over
time, there would be two clear classes of workers at United - owners and
nonowners.
''It was only a short-term, expedient solution to restructure the
company,'' said Jim Megson, a senior consultant at the ICA Group, a
Brookline firm that assists companies in designing ESOPs. While United
early on reaped some of the benefits that are meant to accompany such
programs, like greater efficiency and fewer union grievances and missed
work days, the changes didn't last, Megson said. ''That's the kind of
improvement we look for in ESOPs,'' he said, ''but they failed to get it
in other years.''
United pilot Herb Hunter agrees. Despite all the high hopes for the
plan at the outset - even Robert Reich, secretary of labor at the time,
had championed it as a new model for workers having a stake in their
companies - the ESOP has been a huge disappointment.
''What you need for the ESOP to work was a change in corporate
culture,'' United pilot Hunter said in an interview Friday. In 1994, when
everyone but the flight attendants signed up for the deal, there was
lingering rancor and resentment over past strikes and labor disputes. ''We
decided to try to make a cultural change to make everybody work together,
get everybody on the same team,'' Hunter said. ''On paper it looked great.
But there was never a change in middle management.''
There is widespread frustration among the employee ranks at United
that, while Wall Street assumed the workers were in the driver's seat,
with representation on the board and half the company's stock in a trust
in their name, the employees never wielded the kind of power they would
have liked. The key power of a stockholder, Hunter said, is the right to
sell shares to influence management. But in an ESOP, employees can't touch
their shares until they're 55 and have met their employer's vesting
requirements.
''The only way I get paid for my stock is to die, get fired, or
retire,'' Hunter said.
Over the past two years, United employees have watched their fortunes
dissolve. The airline's share price has slumped from $128 in 1994 to 94
cents at the close of trading Friday. A senior captain at the
Chicago-hubbed airline, Hunter was making $150,000 in 1994 when he agreed,
with his colleagues, to give up $25,000 annually over five years, plus
certain benefits, in exchange for 5,000 shares in the ESOP. By 1999, when
the shares were trading at $80, Hunter's account was worth $400,000. Last
week it was worth $4,600.
For all the dashed dreams, the United employees have behaved very much
like owners - with a great deal at stake - as they faced the prospect of
bankruptcy over the past several weeks. In late October, when State Street
Bank and Trust Co., the ESOP's trustee, took the unusual step of selling
off a chunk of shares in the plan for around $3 a share, the United pilots
wrote a letter urging the Boston financial services firm to stop selling,
and to repurchase shares in the open market to replace any shares that had
been sold. State Street filed with regulators its intention to sell up to
11 million shares. At the same time, United's 401(k) trustee, Aon
Fiduciary Counselors, filed plans to sell 10.6 million additional shares
from company retirement plans.
''You are giving away the economic value of our ESOP stock for next to
nothing,'' said the letter, signed by Paul R. Whiteford, a pilot and
chairman of the United pilot's local. ''And you are limiting our ability
to participate in a successful recovery program through any subsequent
increase in the value of our stock.''
ESOP trustees are normally passive holders and record keepers of
shares. Under federal law, ESOPs are required to be predominantly invested
in the stock of the employer that sponsors the plan. A few plans permit
limited cash holdings or investments to diversify the plan. There's one
chief exception to the single-stock rule: when holding the stock is not in
the best interests of the plan participants.
State Street, which declined to discuss United because it's a client,
has been down this road before. A year ago, as trustee of the Polaroid
ESOP, State Street waited to sell stock until after the photo company went
bankrupt - at 9.4 cents a share. Some employees objected to the sale even
then, saying State Street should have protected what leverage the
employees had left for the bankruptcy proceedings, rather than selling the
shares for so little.
Nevin Adams, executive editor of the investment industry Web site
PlanSponsor.com, based in Greenwich, Conn., said it's historically rare
for trustees to sell shares in an ESOP. But, he noted, ''Everything's
different after Enron.''
Indeed, in the wake of Enron's collapse, trustees are on notice that
they have a fiduciary duty to plan participants, as defined by the
Employee Retirement Income Security Act of 1974. If it's widely known that
a company is at risk of heading into bankruptcy, ''One could argue that as
a trustee, you couldn't turn a blind eye to that,'' said Kenneth Werner, a
partner at the law firm Day, Berry & Howard in Boston.
For State Street, the United situation has been a tough call. Said one
senior executive at the company, speaking on condition of anonymity, ''You
don't go out and sell the shares lightly.'' If the airline files for
bankruptcy by the end of this weekend, as expected, State Street will look
smart for having sold some of the shares. If United avoids a Chapter 11
filing, employees will remain angry that State Street sold off several
millions of shares instead of holding out for a rebound. Either way,
Werner said, someone's likely to sue. To protect itself, he said, a
trustee must show that it has rules and procedures for dealing with a
dilemma such as this, and that it followed them and documented its
actions.
''If you made the wrong call, that's not fatal,'' Werner said, ''as
long as you can prove you did your best.''
The trustee in this case is in the uncomfortable position of pulling
the plug on a fading patient. But the United plan's health began to fail
long ago. The troubles can be traced not only to its noninclusive design,
but to its unwieldy size, specialists said. No other publicly traded
company has ever had half its shares in a trust owned by its employees.
Polaroid's employees owned 18 percent of their company, and in the more
successful Procter & Gamble program, started in 1989, about 7 percent
of the consumer products giant's shares are controlled by the ESOP.
Southwest Airlines Co., famous for its entrepreneurial ways and its sway
with investors, has 12 percent of its stock in an ESOP.
Most ESOPs are at small and midsized companies that are privately held,
consultants said. They can be useful vehicles for sharing the wealth at
family businesses or enterprises where one person controls the ownership.
Of the nation's 10,500 stock-ownership plans, 90 percent are private,
according to the ESOP Association. However, the other 10 percent, which
are publicly traded, represent many more workers. Fifty percent of the 8
million American workers who participate in this variety of stock plan
work for the public companies. Plans established at distressed companies
are the exception, the association said; 95 percent of plans are launched
at healthy companies.
ESOPs surged in popularity through the bull market and vigorous economy
of the last decade. The number of plans more than doubled between 1987 and
2000, to 11,500, with $500 billion in assets. But the market's dive and
the ensuing recession reversed the trend. In fact, the plunge in stock
values has turned upside-down the US worker's love affair with stock
ownership that had become so pervasive during the late 1990s, mainly in
the form of stock options.
Being locked into a stock in a bear market environment would test
anyone's long-term investing resolve. But United's employees may not have
the chance to wait out the market's doldrums. Said Hunter, the pilot,
''The fact of the matter is, we're out of time.''
Beth Healy can be reached at mailto:%20bhealy@globe.com.
This story ran on page G1 of the Boston Globe on
12/8/2002.
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2002 Globe Newspaper Company.