United's Bankruptcy Flirtation and Employee Ownership

The announcement by Untied Airlines that is might file for bankruptcy has prompted a number of media stories on whether the employee ownership plan at the company was part of the problem (see, for instance, the excellent article on this topic in the New York Times August 15). The media has been fairly neutral on the issue so far, but some observers have more pronounced views. Gordon Bethune, CEO of Continental Airliens, told the Times that employee ownership at United was like "inmates running the asylum and having access to the pharmacy," a sentiment shared by many stock analysts. In fact, employees do not run United, but rather have three seats (a minority) on its board and veto power over some strategic decisions. The only point at which their power may have prevented United's board from acting how it would have anyway was in delaying the USAir merger, but even there, the Machinists voted yes, and the merger ultimately failed because of economic and legal questions. There is also no reason to believe that board presence affected labor negotiations. United's employees got substantial raises, but their packages followed common industry patterns.

The real failure of employee ownership at United was that neither union nor management leadership chose to use it to create an "ownership culture," such as that in evidence at Southwest, where employees have a large ownership stake through a profit sharing plan invested in Southwest stock and broad-based options. At Southwest, employees work in teams to make decisions, get lots of information about the company, and have considerable individual authority to do what is needed. At United, this was tried successfully for one year, then abandoned as management and labor went back to their old adversarial style. Moreover, United's ESOP has a very unusual five-year life; most ESOPs are intended to be permanent. So both sides knew that "this too shall pass." Flight attendants were also kept out of the plan (by mutual agreement), meaning there were no "employee owners" meeting people on the planes. Finally, employees took concessions to get the ESOP (something that is very rare), leaving many with a bitter association with the plan form the start.

Overall, ESOPs clearly do improve corporate performance; at United, at best, ownership did not help and may have hurt.