Every Worker An Owner?

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There's some evidence that employee ownership has a salutary effect on corporate performance. A study by Center associate Michael Quarrey, for example, found that companies with ESOPs grew significantly faster, over a period of years, than similar companies without ESOPs -- and the ESOP companies grew faster after they installed their plans than they had been growing before. Even where workers have full voting rights, moreover, there have as yet been no palace coups. "Employees," says a recent Center report, "are very conservative shareholders who regard their stock more as an investment than as an opportunity to control corporate affairs."

To their credit, none of the Center's materials assume that an ESOP can be undertaken lightly. Setting one up can cost several thousand dollars in legal fees alone. Once a company has done so, it must have its stock appraised annually -- and must set aside corresponding amounts of cash for future redemption of employee shares. Nor does the organization argue that ESOPs are a prescription for every corporate malady. Both its books and its newsletter describe the many companies, notably in the airline and trucking industries, that set up well-publicized ESOPs only to find themselves in trouble or even bankrupt a few months later. Usually the ESOP had nothing to do with the companies' difficulties. But a less conscientious organization might prefer to ignore these inconvenient examples.

I wish, given all these virtues, that I could recommend the Center's books and pamphlest wholeheartedly. But they frequently tell you too much about too little and not enough about what seems most important. Take Employee Ownership in America: The Equity Solution (Lexington Books, 1986), written by Rosen, Young, and Katherine J. Klein. The book provides an overview of ESOPs and claims to assess whether they are "living up to . . . expectations." And we learn, in tedious detail, how some of the plans have affected employee attitudes. But we hear scarcely a peep about whether the owners who instituted the ESOPs love them or hate them. Since it is owners who will ultimately be determining the plans' futures, that's a troubling omission.

From a practitioner's point of view, the Center's materials suffer from two generic flaws. One is the relentlessly academic style of presentation. Employee Ownership in America, for instance, reads like a Ph.D. dissertation between hard covers; try wading into a section titled "A Brief Introduction to Correlation, Analysis of Variance, and Regression," and you'll see what I mean. The other flaw, which is more serious, is the Center's unwillingness to probe deeply and skeptically into its subject. Consider Quarrey's report on the improved performance of companies with ESOPs. It's a provocative start -- but we need to know how ESOPs facilitated growth, if in fact they did. Did an equity stake encourage workers to work harder? Or smarter? Were they willing to accept lower wages? What were the trade-offs?

Too many of the Center's writings seem to content themselves with external data, such as financial information and responses to survey questionnaires. What we really want to know is how the changes played themselves out inside the company. Unfortunately, the inside stores provided by Center researchers are terminally bland. A book by Quarrey, Rosen, and Joseph Blasi called Taking Stock: Employee Ownership at Work (Ballinger Publishing Co., 1986) chronicles the experiences or roughly a dozen companies with substantial employee ownership. And guess what? Nearly every one thinks worker ownership is just great, and nearly all the plans seem to be working smoothly. There's no ambivalence, no conflict -- and no credibility.

This is a shame, because elsewhere in the Center's case materials you find hints -- just hints -- of intriguing situations. At a Michigan company called Eberhard Foods, the ESOP became a weapon in a bitter internecine struggle between the 82-year-old principal owner and his daughter. At Up-Right Inc., a California manufacturer, management coped with a business downturn by closing several facilities -- and employees, who voted about 40% of the stock, apparently accepted the move. At Pamida Inc., a Nebraska department-store chain that was 100% employee owned until 1986, the ESOP sold the company to managers in a leveraged buyout.

I'd like to know more about all these cases, if only because they suggest real or potential points of conflict that any ESOP could run into. Did any worker groups at Up-Right oppose the closings -- and if not, why not? Was there any opposition to the sale at Pamida? When the magazine U.S. News and World Report, also employee owned, was sold by its workers to new publisher Mortimer Zuckerman, former employees brought suit, charging that they had cashed in their share for substantially less than the shares turned out to be worth on the marketplace. Did anything like that happen with Pamida? What's to prevent any successful ESOP from selling out once the stock has appreciated?

In such cases, I suspect, lies the truth of ESOPs -- that they are interesting, often useful, and potentially messy structures that, like most changes in ownership, can dramatically affect a company's future for good or for ill. Maybe there are a few visionary owners who can turn equity over to their workers without a shade of self-doubt, and who can make the new structure work harmoniously. But since the tax laws are making ESOPs more and more attractive to us ordinary mortals, it would be nice to learn about ESOPs involving some blood, sweat, or tears. Changing a company's ownership usually entails a little of all three.

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