These financiers were former strikers seeking a more perfect union -- of labor and capital -- not for the sake of some socialist ideal but for a steady paycheck. It was a marriage of necessity: Kiwi had to be employee owned, for the simple reason that "no one else would give us a dime," Iverson admits. The capital markets rejected the idea that cheap labor and plentiful equipment were enough to keep a new airline aloft. So Kiwi's employees became investors of last resort, buying jobs from an employer of last resort. The company got capital cheap. A per-share price of $5 was generous. And arbitrary, according to Iverson. Employee shareholders paid up front and, in most cases, in cash. Pilots anted up $50,000 apiece, everyone else $5,000. Until February of this year, they did so as a condition of employment. And they did so without the protection and rights that most of the 10 million employee owners in this country claim as shareholders.
Kiwi has no ESOP. It never played by the rules of a qualified employee stock ownership plan -- which mandate regular reporting to shareholders and regulators, and which Iverson says were "too burdensome."
While most ESOPs grant stock at no cost to employees -- and set up a separate trust to borrow money and pay the seller for that stock -- Kiwi billed shareholders individually. Even when ESOPs exact an employee contribution, they usually ensure that workers pay in pretax dollars. Kiwi took their money after taxes. In ESOPs, shares are valued according to an independent appraiser's estimate of their worth. There was no oversight to the pricing at Kiwi. Federal law requires that ESOPs allow employees to cash out by buying back their shares. Kiwi made no such promises. In fact, a senior lender has prohibited the company from repurchasing stock, making the employees who bankrolled Kiwi utterly captive investors.
The company, however, benefited enormously from the joint-ownership deal with employees, reaping lower labor costs and fawning press. Kiwi's newly certified owners turned from their union ways. Pilots earned a third as much as their counterparts at United, Delta, or American command. Even Iverson made a mere five figures.
No work rules hindered their volunteer spirit: Pilots pitched in to clean airplanes on tight turnarounds. Flight attendants bought flowers for the planes' bathrooms and served gourmet meals. Nobody tossed peanuts.
Passengers, in stunned gratitude, wrote phrases like "God bless you" on their comment cards. In 1994 Kiwi was voted best domestic carrier by CondÉ Nast Traveler.
"The same people that Frank Lorenzo [who seized Eastern Airlines in 1989] said were a problem went out and built the best airline in America," says pilot Andy Sapol. For these former employees of the industry's dead or dying, Kiwi's rambunctious growth from zero to $114 million in less than three years was the sweetest revenge for the jobs they'd lost and the airlines they'd buried.
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The Management
Anything but professional
Although Iverson and his four founding partners were handing out stock as quickly as they could persuade employees to pay for it, they were not handing over control. The shares employees bought carried no voting rights, which means that employee shareholders at Kiwi can't so much as rubber-stamp a board decision, much less override one.
Voting rights were instead pledged to a voting trust that will reign until 1997. Originally composed of Kiwi's five founders and still made up of insiders, the trust is run by a junto of pilots who appointed themselves to five-year terms. The trust, in turn, controls the board. "The voting trust was designed to be all-powerful," says lawyer Martin Hauptman, who set up the voting trust and drafted Kiwi's corporate bylaws. "Ostensibly, it was tailored to maintain control of the company in the face of an external takeover threat. But it was also drafted to prevent employee shareholders from exercising any rights."
It's not unusual, even in majority ESOPs, for management to appoint a trustee to vote for the employee shares, according to Corey Rosen, director of the National Center for Employee Ownership, in Oakland, Calif. "But I don't know of any case in which employees purchased shares outright and did not get voting rights," he says.
Now that the airline is on the ropes, the shareholders have almost no recourse for changing the direction of the company or the composition of its management. Nor can they remove the trustees who call every shot, clear of shareholder proxies.
According to the trust's bylaws, a trustee can be removed only if a majority of the remaining trustees vote to dismiss him from both the trust and the board. That technicality, which protects the trust from outside assaults, is what put Iverson, the founding CEO, in jeopardy. When Iverson was escorted from the company's headquarters in a humiliating exit in February, a 4-member minority of the 12-member board had engineered it.
Whether the ouster was prompted, as the trustees allege, by Iverson's inadequate leadership or whether it was the result, as Iverson charges, of personal rivalries, the trust used its extraordinary power to conduct a secretive purge without a vote by the board or the shareholders.
They had staged a coup in a company that billed itself as the ultimate democracy.
Collectively, the trustees hold less than 5% of Kiwi's stock, but the trust ensures they will control more than 50% of it. The trust itself cannot be abrogated without the unanimous consent of all shareholders. And since at least a handful of those shareholders have an interest in maintaining their positions as trustees, unanimity is unlikely.
