Trouble in Workers' Paradises

Trouble in Workers' Paradises Some cases of employee capitalism turn into ESOP fables

South Bend Lathe Inc. in Indiana was until recently the very model of a modern worker-owned corporation. Five years ago, the 74-year-old machine-tool maker was saved from closing by its 500 employees, who bought shares in the firm through an ESOP (Employee Stock Ownership Plan). Money for the stock purchases was provided by a loan funded by the Federal Government. With a team of new managers, the company prospered under its new worker-owners. Productivity increased, and sales nearly doubled, to $24 million. Now, however, a strike has closed the company, and about 300 employees are walking the picket line. Says bewildered Strike Leader Steve Kwiatkowski: "I'm still confused why I'm here. If I'm an owner, then how can I be on strike?"

The problems at South Bend Lathe are symptomatic of those that threaten to turn employee-owned companies into ESOP fables. Tension and distrust between workers and their managers developed over control of the company. Owing to a recent downturn in company profits, the value of the stock has declined 16%, and some workers are suing over pension benefits lost when the ESOP was introduced.

"Worker capitalism" sounded promising when Congress approved the ESOP program in 1974. Any company could transfer some or all of its stock to a trust, which then allocated the shares to workers. Employees would feel they had a stake in the firm's success and build up savings with their own stock.

Since 1975 about 3,000 firms, most of them small, have begun ESOP programs by turning over some stock to employees. Even giants like AT&T, Atlantic Richfield and Mobil have set up ESOPs. The plan, however, does not always work as intended. According to a Government Accounting Office study completed in June, some workers are being cheated because their firms have transferred stock to employees at inflated value. This means that when workers retire or quit, the stock may be worth much less than they expected. In other cases, voting control of the shares remains with the trust set up by the management, leaving workers with no say in running the company.

Worker-owners sometimes do not become good managers. At International Group Plans, a Washington, D.C., insurance company, the founder turned over half-ownership and control to the employees; they then fired the unsympathetic managers and voted themselves higher wages and long vacations. The firm was near collapse when the owner stepped back in and resumed running the firm.

Studies are inconclusive as to whether workers are more productive as shareholders rather than ordinary time-clock punchers. A University of Michigan project indicated that employee-owned companies can be 1.5 times as profitable as competing firms because there is less waste and absenteeism and greater productivity. But when worker ownership is spread out among hundreds of employees, and outside managers run the firm's operations, there is little benefit. Concludes James O'Toole, an associate professor of management at the University of Southern California: "Few companies have found a measurable effect on worker motivation, performance or productivity resulting directly from stock ownership. Little increase is visible in job satisfaction, morale or company loyalty."

Still, some employee-owned companies are resounding successes. Several cooperative-owned plywood companies in the Northwest were so profitable that they were bought out by larger firms. Puget Sound Plywood Inc. in Tacoma, Wash., flourished for years under a system in which the chairman was elected by the employees and received the same pay as hourly workers. Says Chairman Fred Brock: "The strength of an employee-owned company is that you try harder."

Maybe so. But effective worker-ownership programs will require stricter regulation of stock prices and a clearer understanding of who is running the store. Thus far ESOPs are clearly no panacea for workers or their bosses.

This file is automatically generated by a robot program, so viewer discretion is required.