What Happened at United?

What happened? Why didn�ft United fare better, especially in light of the claims of employee ownership proponents that cutting workers in on a share of the ownership is a sure way to improve business results? This important story bears careful examination.

Theories About the Demise

In the flurry of media attention since December 9, there have been almost as many theories floated about the role of employee ownership in the demise of United as there have been commentators – and there have been many, many of those. Among the views: employee ownership hurt United and led to the bankruptcy; it helped United, but not enough to overcome bigger problems; it neither helped nor hurt; it is a borderline-Marxist pipedream that will always lead to a company�fs failure; it is a sound strategy that can boost productivity and business performance at any company; and yes, it�fs a sound strategy, but only if done right.

Before trying to extract too much from the United Airlines experience, it may be worthwhile to recognize the limits of such an exercise. As any statistician will affirm, a sample set of a pretty healthy number is required before we can begin to establish a cause-and-effect relationship with any kind of reliability. Trying to discern fundamental truths about employee ownership by studying a single instance – whether it be United Airlines or any other – ranks right up there with reading tea leaves.

Fortunately, reliable scientific data on employee ownership is readily available. Numerous studies, carefully structured to control for other factors, have shown convincingly that, on average, companies that have given their employees a significant ownership stake have prospered and grown faster as a result, by factor of about 3 percent annually.

But that�fs not all we can learn from the collected data. Further examination shows that certain of these companies with employee ownership outperformed conventionally owned companies by significantly more than the mean 3-percent rate. Companies that really did it right actually outpaced the control businesses by, depending on the industry, 8 to 11 percent.

By viewing the United experience with the benefit of this scientific input, we can pretty quickly run through the laundry list of theories about employee ownership laid out above, confirming or dispatching as appropriate. Employee ownership hurt United and led to the bankruptcy? Not likely. It helped United, but not enough to overcome bigger problems? Still in the running. It neither helped nor hurt? Perhaps. It is a Marxist pipedream that leads to company failure? Completely unsupported. It is a sound strategy that can boost productivity and business performance at any company? Unproven. It can improve business performance, but only if done right? We have a match! Clearly, this is the theory that is most consistent with the research data.

So, if we read the research data to tell us that employee ownership significantly improves business performance if it is done right, then we have to conclude that United didn�ft �gdo it right.�h Truth be told, United did not dramatically underperform its competitors (the times have not been kind to the airline industry – consider the bankruptcy at U.S. Airways, the bankruptcies at America West and the bankruptcies and ultimate distress sale of TWA). But it cannot claim to have outperformed its peers, either. And so, we arrive at the key question: what does �gdoing it right�h entail, and how did United fail at that?

Doing It Right

In the 27 years since ESOPs were first authorized by federal law, thousands of companies have put the ESOP program to work, amassing an extensive collective record of experience. Economic researchers sifting through this data and veteran practitioners alike have pretty consistently arrived at the same findings. The number-one pitfall on the employee ownership path is the naïve assumption that if employees are awarded an equity interest in their company, they will, ipso facto and without any other changes in the company, improve their personal dedication, commitment and job performance, leading to an improvement in the financial results of the business.

It turns out that this simple belief assumes too much. It assumes that ordinary employees understand what needs to be done to improve the company�fs financial results, and that, in turn, they understand how company financial results affect the value of their stock holdings. It also assumes that the attraction to cold, hard dollar growth in their long-term stock holdings is the primary motivation in their lives. All of these assumptions, it turns out, generally miss the mark.

In fact, experience shows that cutting employees in on the company�fs ownership only sets the stage for the creation of a high-performance organization. With the stage thus set, the company then has to get going to take advantage of the opportunity. What needs to be done can be captured in two words: employees need to understand; and they need to be engaged.

They need to understand this full-contact sport their company is playing, called competitive business. What are the rules? What are the key objectives? What are the tactics? How do we keep score so we can tell how we�fre doing? If employees don�ft understand the challenges facing the company – if they don�ft understand the whole picture of what needs to happen for the company to succeed – they are left powerless to contribute. All they can do is go back to work as usual and wait for the boss to tell them what to do – pretty discouraging if you�fre an employee who has been told that you and the rest of your colleagues are being made co-owners of the place.

And, more than simply having an accountant�fs understanding of rules and scorekeeping, they need to be engaged as fellow players, working in common cause toward shared goals. Call them teammates or call them partners. But, for employees to rise to their potential as employee-owners, their company culture (a product as always of the actions and attitudes of top management) must affirm their value and their dignity, rather than sending the message that they are just hired help brought on to do the bidding of the bosses.

Giving employees a stake in the outcome, then, lays a foundation for the creation of an inspired, committed, creative and high-performing workforce. It is the springboard for creating common purpose, and engaging not merely their financial self-interest, but their hearts and minds in the hard-hitting sport of business.

Employee Ownership at United

So how does the United experience measure up against this picture of how to �gdo it right?�h Did the employee stake in ownership serve as the cornerstone for a new way of operating that united the company from top to bottom in common cause, with all eyes focused on a shared goal of superior company performance?

Not even close. Leading up to the formation of the ESOP, the history of employment relations at UAL was one of contentious labor-management confrontation, especially between management and the unions representing the Pilots and the Machinists. Rather than serving as a pathway to move beyond those adversarial relationships and forge true common cause in support of company success, the ESOP, for many, merely represented a tactic in that unending battle. Management saw it as a tool to extract wage rate reductions from their long time adversaries across the bargaining table. The unions saw it as tool for assuming greater control over decision-making at the top, through the power of the shareholder vote and a presence in the boardroom itself. Well into the ESOP experience at United, there remained a continuing sense of �gus�h versus �gthem.�h

Rick Dubinsky, the head of the Pilots union at United at the time, acknowledged this grim state of affairs when he spoke at the Beyster Institute�fs 2001 Annual Conference on employee ownership. �gThe ESOP was first championed by the employees, not management,�h said Dubinsky, who was appointed to a seat on the airline�fs Board of Directors after the ESOP was launched. �gWe pursued it as a way to redirect the future course of the company. Our motivation was to force the company to return to its core airline business, to improve our ability to influence the direction of the company and to secure our careers.�h

The truth is that United is the poster child for how not to do it right. Consider:

• From the start, the ESOP arrangement excluded the flight attendants – a full one-third of the workforce and the public face of the company.
• Rather than making a commitment to the idea of going forward into the future as an employee-owned organization, the ESOP was structured to cease including new hires after just five years.
• The primary benefit sought through the employee ownership program was �gcontrol�h via a greater role in corporate governance.
• The employee ownership program offered no opportunity for the employee-shareholders to receive any financial benefit from their ownership prior to retirement – other than using their increased say in corporate governance to push for wage increases.
• After a brief initial effort, the company abandoned efforts to open up new channels of communication and participation to involve employees in finding better, more efficient ways of getting things done.

At healthy employee ownership companies, the people recognize sensibly enough that the company is the �ggolden goose�h upon which they all depend. Keeping the goose healthy therefore comes first. At United, it seemed that no one was looking after the well being of the golden goose. Instead, the focus was on who would control the goose, and how would they divide the eggs. Many seemed, consciously or unconsciously, to subscribe to the view of those who launched the Titanic in 1912 – that it was so big that it couldn�ft possibly be destroyed.

Indeed, the sheer size of United has been cited by some as a key factor in the failure of employee ownership to make more headway than it did. Sure, they say, you might be able to bring people together as a team when you�fre dealing with 600 employees. But at 60,000 employees, United was simply too big. It�fs too much, they say, to expect a large company with a union environment to be capable of going down the �ghow to do it right�h path.

But such comments disregard the record. In fact, other large companies have shown that they can not only survive, but thrive with employee ownership – indeed, because of it. Examples are numerous:

• UPS (�gthe tightest ship in the shipping business�h) has a unionized workforce and well over 300,000 employees. It hasn�ft stopped them from operating successfully as a company in which the employees own a majority stake.
• Publix Supermarkets, one of the most successful supermarket chains in the Southeast, is owned - lock, stock and barrel - by its workforce of more than 100,000 people.
• Science Applications International Corporation (SAIC), one of the most successful technology companies in today�fs post tech meltdown era, has grown to a highly profitable company of more than 40,000 employee owners, having operated as an employee-owned company since its founding 32 years ago.

Most of all, consider Southwest Airlines. With more than 85 percent of its employees represented by a union, it has the highest percentage of unionized employees in the airline industry. Yet they have executed the �ghow to do it right�h program to perfection. Through retirement plan holdings and stock options, the employees have a collective stake in 12 percent of the company�fs ownership (and growing), plus profit sharing arrangements that add to their interest in the results. That stake in the outcome cements a way of operating that is the essence of coming together as a team to work together toward shared goals and shared results. It�fs the airline that no competitor can keep up with, because every employee is pulling an oar, maintaining the team rhythm and keeping focused on goal ahead.

Do it right versus do it wrong? Southwest versus United.