Why did employees put up the bulk of the money and agree to forfeit almost all control?
"We felt a tremendous debt of gratitude to the people who put this airline together, who gave us our careers back," says pilot Sapol. Besides, the managers of Kiwi weren't really management: they were brother pilots. The companywide distrust of professional management ran deep; it was the legacy of workers' defeat at the hands of Frank Lorenzo, whose ghost still haunts the airline's survivors nearly seven years after Eastern folded. "Control was very important to us," says recently ousted chairman John Anderson.
Control was so crucial and paranoia so powerful that the voting trust stacked the board with like-minded pilots, not practiced managers, and awarded vice-presidencies in strategic planning and human resources to individuals who had never performed those functions at another airline. The CEO himself had never managed so much as a baggage carousel.
Only one of the original directors had been an airline manager. "Even when employee owners do call the shots about who should run a company, they usually hire managers who look like the top management at other companies," says Rosen, the employee-ownership expert. "Most of the time, they're not looking for somebody just like them. They're looking for somebody who knows how to make them some money."
Kiwi's employee owners never got that chance.
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The Structure
A broken chain of command
"We started out with an idealistic, egalitarian notion about how the company could be run," recalls Iverson. "We had been steamrolled by management in the past, so we wanted to create a management structure that was very horizontal, very team oriented."
The result: the trustees, all of them initially carrying titles of vice-president, failed to devise a clear chain of command among themselves or other top executives. The management, which would swell to 11 vice-presidents, behaved like a confederation of feudal lords, resisting centralized government.
Iverson kept the titles of chairman, CEO, and president, a presumption that clearly rankled his cofounders, but he grew increasingly politically weak. The more he tried to impose a conventional management structure, he says, the more unpopular he became among the pilots who sat on the board and controlled the trust.
"The VPs all operated under the presumption that orders were suggestions," says Iverson. "They undermined the notion that any one person should be a leader."
Replies former chairman John Anderson: "We didn't have a leader in Bob Iverson. He never showed himself capable of running this airline profitably."
Iverson says he had neither the authority nor the political capital to sway managers in crucial matters. His hiring decisions were ignored or overturned, he says. His equity deals, including one earlier this year that he claims would have brought in $7.5 million for 51% of the airline (with an option to buy back control) and weakened the voting trust, were rebuffed. The deal would have diluted shareholders' stakes, but industry analysts such as Cameron Burr, managing partner of Burr Associates, an aviation advisory firm, predict that dilution is inevitable for shareholders whose equity now has a negative value of $21 million.
Iverson's attempts to discontinue unprofitable service to San Juan, Puerto Rico, were resisted. His orders to match competitor Continental Airline's fares were subverted, he maintains. His efforts to augment revenues with charter service were sabotaged, he says. Over time Iverson's ability to manage his officers' dissent eroded.
"Sometimes he'd have 11 people yapping at him," reports one insider. "And he'd throw up his hands and walk out." Iverson didn't exactly endear himself to the three members of the trust whom he attempted to demote or fire. He "had a tendency to throw gasoline on fires," says another insider. Iverson contends that his comrades, who believed their power should be equal, resented his getting too much authority.
The consequences of Kiwi's politburo approach to management and Iverson's failure to master or change it were far-reaching and grave. "Kiwi was too distracted with internal affairs to address external threats quickly," says Joe McCune, a consultant who in 1994 advised the company to pare its management structure. Filibustering and dissent made decisions about routes, fares, leases, advertising campaigns, and equity deals impossible. "We ran the company like a little pilots' union or a flying club," Iverson says, "not like a business."
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The Numbers
Ugly and hidden from view
Despite Kiwi's communal ownership, the company's books were slammed closed. Before coming aboard, employee shareholders received no financial projections. Afterward they got no statements of actual financial results. Until this year, Kiwi had never held a formal annual meeting.
Even outside investors got scant information about the airline's worsening condition. "Getting regular financial statements was a problem," says Norman Waltuch, an investor and outside director.
