[Marxism] The Economist: An ESOP to the workers

["John A Imani" <johnaimani@xxxxxxxxxxxxx>]

An ESOP to the workers

Apr 12th 2007 | NEW YORK 
>From The Economist print edition
http://economist.com/business/PrinterFriendly.cfm?story_id=9012588


Giving workers a stake in troubled firms may not be the answer

IF ALL else fails, hand the workers some equity. That seems to be the new 
philosophy of America's private-equity firms, at least, judging by the bidding 
war for Chrysler and the recent deal to buy the Tribune newspaper group. Each 
time, a large, and possibly controlling, slice of the firm's equity is likely 
to end up in an employee share-ownership plan (ESOP).

Anyone seeking in this the spirit of Robert Owen, the father of the workers' 
co-operative, or of Louis Kelso, an American lawyer who invented the ESOP in 
1956, is likely to be disappointed. Neither deal foresees a big role for 
workers in corporate decision-making, as advocated in Kelso's book, "The 
Capitalist Manifesto", written with Mortimer Adler. Today's plan is to use 
ESOPs to achieve narrow financial goals, not to forge an enlightened bond with 
workers.

Financial engineering is central to the deal announced earlier this month to 
sell Tribune to Sam Zell, a real-estate tycoon. Although the purchase price was 
advertised as $8.2 billion, Mr Zell will have to cough up only $315m (assuming 
that other potential buyers, such as billionaires Ron Burkle and Eli Broad, do 
not return with a higher offer). Ultimately, the rest of the money will be 
borrowed by a newly formed ESOP, which will eventually own most of Tribune's 
equity.

One of the main attractions of this arrangement is that the ESOP structure will 
bestow huge tax breaks on Tribune. The benefits to employees are less clear. Mr 
Zell has not said anything about giving workers a bigger say in running things. 
And Tribune will stop making matching contributions to employees' individual 
retirement schemes; instead, pension provision for employees will now consist 
entirely of shares held by the ESOP.

Some form of ESOP is reportedly also part of each of the various bids for 
Chrysler, the struggling American arm of DaimlerChrysler. When Daimler bought 
Chrysler in 1998, it paid $35 billion. Analysts now value it at no more than $8 
billion, though Daimler may be fortunate to get anything close to that for a 
business that some experts think is destined, sooner or later, for bankruptcy, 
along with Detroit's other giant car manufacturers, Ford and General Motors.

On April 5th Tracinda, the investment vehicle of Kirk Kerkorian, a buy-out 
veteran, offered to pay a paltry $4.5 billion for Chrysler. Mr Kerkorian's 
offer assumes that Daimler will retain some of Chrysler's crippling health-care 
and pension liabilities and that the firm's employees will take a big chunk of 
equity in exchange for giving up some promised benefits.

Overall, ESOPs seem to improve the performance of firms that have them, which 
may explain why they are increasingly popular. Some 10m American workers are 
members of ESOPs, which together control assets worth an estimated $600 
billion. However, it is less clear that they help firms in upheaval or 
confronting possible failure-such as Tribune and Chrysler.

ESOPs "aren't magic", argues Corey Rosen, who runs the National Centre for 
Employee Ownership. In his view, they "only improve performance when they are 
part of creating a culture of employee involvement, with plenty of 
opportunities for workers to participate in the big decisions facing the firm."

One success was Floturn, a troubled machine-tool maker that was bought through 
an ESOP from its parent, Belcan, in 1988. The management got the employees to 
help overhaul the firm's business, which led to huge improvements in 
productivity and profits. That rare triumph must be contrasted with the more 
typical experience of United Airlines. In 1994 an ESOP bought 55% of its 
equity, not least because the unions saw that as the only way to stop the then 
chief executive from making big (and, with hindsight, essential) job cuts. 
After an initial success, the unions and management quickly reverted to 
confrontation. In 2002 United entered bankruptcy, and the ESOP became 
worthless. Tribune and Chrysler would do well to avoid a similar fate.


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