WHEN WORKERS TAKE STOCK

...U How ESOPs Work An Employee Stock Ownership Plan (ESOP) enables workers to hold collective equity in the business that employs them...

...On the other hand, Mansfield workers worried—and as it turned out, they were right—that no one would want to buy their foundry...

...However, the same flexibility that makes ESOPs so attractive to management also permits them to be structured to provide impressive degrees of democracy...

...Changes at Seymour are less notable— the time clocks remain, for instance, and hiring is done by management, largely because a strong United Auto Workers local has kept traditional labor-management issues within the bargaining process...

...Even voting rights and employee seats on boards of directors don't necessarily turn worker ownership into worker control...

...The company's contribution is deductible against corporate taxes...

...Some strikingly democratic—though unheralded—workplaces are being created in the United States today...

...Since the restoration of the wage cut after the first year in the black, the company is exploring new ways to link shares to hours worked rather than pay...

...At Mansfield Ferrous Castings (MFC), the average hourly wage was cut from $11.50 to $8.50...

...An employee ownership plan may hold a fraction of 1 per cent of the shares in a business, or it may hold 100 per cent...

...At Seymour, with a more promising balance sheet, employees made no benefit concessions but agreed to a 10 per cent wage cut to service the new company's debt...

...in a subsequent nonbinding secret ballot among hourly workers, the vote was 114 to 2 against union representation...

...The number of foremen has been reduced, and those remaining work in production as well as supervise...

...It terminated the company's pension plan and pledged to put $36 million worth of excess pension-fund assets into an ESOP...

...Time clocks were removed...

...National Distillers harvested favorable publicity, and Harvey Hubbell saw an opportunity to cut its losses on the foundry while retaining it as a supplier...

...Second, productivity would increase with employee commitment...

...The new board drawn from the plant took only fifteen minutes to authorize the purchase...

...In Mansfield and Seymour, the prospects looked grim...

...J.L...

...they were community fixtures...

...Many of the most impressive are in companies that were bought by employees to avert shutdowns, though these tend to be better models of democracy than of financial stability...

...Company contributions may range up to 25 per cent of wages, and may vary from year to year...

...Seymour has rehired all employees laid off at the time the firm went employee-owned, and MFC's employment is up from 140 to 190...

...In neither case was the parent company committed to its subsidiary...

...Local managements at both plants sought funds to buy them from the parent companies...

...Ultimately, the outside bidder bought the company and the $27 million was used to reduce Graniteville's debts instead of being deposited in the ESOP...

...ultimately, they are forced to shut down...

...A company's contribution to repayment of an ESOP loan is tax-deductible, and commercial lenders are allowed to deduct half the interest they earn on ESOP loans...

...the latter exceeds the net worth of all but the top fifth...

...Finally, in the case of the foundry, separation from Ohio Brass would permit aggressive pursuit of external contracts...

...These cases are extreme or they would not have wound up in court...

...Both Mansfield Ferrous Castings, i which passed into the hands of its "employees in December 1984, and Seymour Specialty Wire, which followed in April 1985, have established a highly democratic structure of ownership and control...

...Conventional judgment would have shut them all...

...10 per cent equally among salaried employees, and the remaining 60 per cent among hourly workers according to their wage scale...

...In the last few years, however, unions have become increasingly sophisticated in dealing with worker ownership...

...Salaried employees gave comparable concessions...

...The former figure exceeds the net worth of half of all American families...

...You don't make money in offices," says Pollock, and that change accounts for a good portion of the sharp gains in productivity at MFC...

...Only a handful—about 2 per cent—were acquired by workers to avert a shutdown...

...With experienced management in place, the first major hurdle was convincing lenders that an employee-owned firm was worth backing...

...At Seymour, new employees are automatically included in the ESOP, but each Seymour employee's share varies with wages (on the premise that each employee has given up 10 per cent of his or her income and hence ought to be proportionally rewarded...

...Of eight banks approached, six were willing to finance the deal, and employees did not have to put up any equity...

...It's a tough question, but unfortunately it rarely comes up...

...As Drescher puts it, "We don't pay for the corporate jet any more...

...Workers still work and managers still manage, but there is often less hierarchy and more communication...

...Seymour's profit-sharing plan is not so elaborately structured...

...if the plant went under, so did the owner...

...At Seymour, this was not particularly difficult since the firm was profitable...

...As that production declined, so did the foundry's market...

...Workers never enjoy making wage concessions, but in a company they own themselves, the givebacks can be regarded as taking money out of one pocket and putting it into another...

...They have been partially acquired by their employees through company contributions to ESOPs, or sold to their employees by retiring owners, or bought by employees to fend off other purchasers...

...Third, both plants had reasonably modern facilities in industries where relatively static production technology required little new investment...

...Why do employee-owned firms seem to do better than traditional corporations...

...twelve paid holidays dropped to seven...

...For eleven years as plant manager, Drescher tried to get National Distillers to agree to buy a machine that now costs $1 million...

...Studies conducted in recent years confirm that when all other considerations are equal, employee-owned enterprises outperform conventional companies in profitability, growth of productivity, volume of sales per employee, and number of new jobs created...

...Slightly more than 10 per cent of the $5 million package was raised from employees at Mansfield as a $4,000 loan from each...

...Though several worker buyouts, including Rath Packing and Atlas Chain, have ended in well-publicized bankruptcies, four-fifths of the plants bought by employees to avoid shutdown are still functioning...

...The workers at Seymour and Mansfield know how to make special alloy wire and how to cast iron...

...Mansfield Ferrous Castings also has a nine-member board that meets monthly...

...This will produce a higher absolute dollar bonus to blue-collar employees, and it includes nonowners as well as owners...

...But what role should the union have if employees really run the plant...

...More important than the board at Mansfield is a second decision-making body: the steering committee responsible for day-to-day shop operations...

...These are ESOPs used, typically, to provide managers with shares at a fraction of the cost at which the ESOP acquires stock...

...But the Mansfield ESOP made no provision for making newly hired employees owners...

...A more common employee disappointment with ESOPs has been the failure in many instances to give workers a significant decision-making role...

...There are special tax breaks for family-owned businesses sold to their workers through ESOPs or co-ops...

...The rest are employed by multiplant corporations that can easily shut a local facility but stay in business...

...A sharp improvement in productivity has enabled MFC to get up to 40 per cent more production out of equipment than competitors get out of newer models...

...Large, multiplant corporations often drain assets from one plant to invest them elsewhere—overseas, in another state, or in another industry...

...Other investors can control a large corporation by owning a quarter of the stock, but employees cannot...

...Bridgeport Brass's Seymour wire mill was profitable...

...So far, the unions that have been burned by employee ownership were hurt because employees were given too little power, not too much...

...At MFC, profits are to be distributed through a profit-sharing plan that clearly favors the hourly workers...

...The committee decides all major and minor policy questions, including investments, vacation schedules, plant rules, disciplinary actions, benefits, and rates of pay...

...At Mansfield Ferrous Castings, management moved from the Ohio Brass office building into the foundry itself and is now housed in what used to be a pattern vault...

...The most obvious answer is the $2.5 billion annual tax subsidy for ESOPs, designed to spread the ownership of productive capital among workers...

...He is co-author (with Jim Quilligan and Barbara Weissmann) of "Buyout...

...A 1985 study by the National Center for Employee Ownership (NCEO), based on the performance of 147 ESOPs, projected that an employee earning the median wage of $18,000 in 1983 could expect to accumulate an ESOP share worth $31,000 in ten years and $120,000 in twenty...

...it turned to outside customers...

...Over the vehement opposition of employee board members, the rest of the Eastern board sold the company to Frank Lorenzo, the antiunion chairman of Texas Air...

...While the stock is held collectively in the plan, individual employees acquire vested rights to their shares, either immediately or over a specified period...

...this encouraged bankers to approve loans at reduced interest rates...

...It works this way: A company contributes stock (or the cash to buy stock) to an employee ownership plan...

...Federal legislation requires that the voting rights on ESOP stock be passed through to employees on only a restricted group of issues, including mergers, sales, and liquidations...

...But employee-owned firms reinvest...

...Because of tax incentives enacted since 1973, about 7,500 companies employing more than seven million Americans have adopted Employee Stock Ownership Plans (ESOPs...

...its one bonus to date has been a lump sum of $425 to each employee regardless of wage level...

...By 1982-1983, the foundry was running at a loss in an industry with severe domestic overcapacity, low-wage Korean and Brazilian competition, and declining demand...

...Decisions are reached either by consensus or by one-person-one-vote balloting, and the shop-floor members can overrule the management members...

...Seymour, Connecticut, and Mansfield, Ohio, are small industrial towns with respective populations of 14,000 and 50,000...

...What should a worker-owned enterprise do with profits beyond those needed to service loans and provide reinvestment...

...It consists of ten shop-floor workers and three employees from management...

...In Seymour, Carl Drescher, who had been plant manager for eleven years, led the salvage operation...

...The firm is now trying to figure out how to open the ESOP—under IRS regulations it must enroll at least 70 per cent of employees—to include the new hires while preserving some advantage for the original risk-takers...

...Cooperation of the parent company was a crucial factor in both employee-takeover attempts...

...Trading wage concessions for equity in troubled companies has the advantage, at least, of providing an answer when profitable companies demand equal concessions: "We only make concessions for equity...

...Seymour's basic decision-making body, a nine-member board of directors that meets monthly, includes the chief executive officer, the head of the local union, five elected members, and two members from outside the company...

...Thanks to employee ownership, they hope to be doing it for many years to come...

...Some are good models of both...

...The union sought representation at MFC under a successorship clause, but when the question went to the MFC steering committee, the hourly members opposed it...

...It closed the Barber-ton, Ohio, insulator plant which had employed 600, moved one of three Mansfield plants—the expanding polymer insulator National Parkway plant—to South Carolina, and sold the foundry to its employees...

...those currently include two hourly and three salaried employees...

...In one case, the management of Hall-Mark Electronics allegedly bought out the company's ESOP stock at $4 a share, then turned around and sold the company at a tidy $100 per share...

...In the other case, the management of the Graniteville Company, threatened by a hostile takeover bid, sought protection by acquiring the company through a leveraged buyout...

...It led the field in a number of its products, and employees feared that a competitor who bought the plant might be more interested in acquiring the market than in maintaining employment...

...This occasionally produces outrageous results, including the notorious case of South Bend Lathe, where employees were reduced to going on strike against the company they owned but could not control...

...The ratio between hourly and salaried employees has risen to 9:1 from about 3.5:1 under Ohio Brass...

...Labor officials are used to bargaining on wages, hours, benefits, and working conditions, not for a share of ownership...

...Each employee has one vote (regardless of number of shares owned) in choosing the five elected members of the board...

...Harvey Hubbell, faced with a crisis in the electrical-generating industry brought on by energy price increases, moved quickly to redeploy Ohio Brass's assets...

...That kind of locally owned plant has become an endangered species, employing less than one-fourth of today's manufacturing work force...

...Seymour Specialty Wire, secure in its niche, is doing well, partly because two of its conventional competitors have folded...

...Weirton invested $136 million in capital improvements during its first two years of employee ownership, and did sufficiently well in its second year to bring into play a profit-sharing mechanism that produced an average payment of $2,400 per employee...

...All steering committee meetings are open, and interested employees frequently sit in...

...Instead, the ESOP trustee (typically a bank or insurance company) votes the stock as instructed by a committee appointed by the firm's board of directors...

...Typically, they are in companies where employees own most or all of the stock...

...Ownership of ESOP stock is often separated from control...

...It was something that happened far away—in Yugoslavia, say—and was discussed at conferences held in Scandinavia...

...And for eleven years he failed, despite the fact that the machine would have paid for itself in only nine months...

...some costs—overhead and labor—would go down, and, more important, the plants would be able to retain their profits...

...In both cases, employees granted substantial concessions that helped persuade lenders...

...Mansfield's ESOP is among the most democratic possible in terms of ownership: Each of the original 142 employee-owners owns 1/142 share of the net worth of the ESOP...

...The scrap level at the foundry has fallen from 14 to about 9 per cent, and would be lower still were it not for the fact that the foundry is casting many new patterns...

...The steering committee representatives meet with their groups for thirty to forty-five minutes once a week, and they generally cast their votes as instructed delegates...

...Both have been plagued in recent years by disinvestment and plant closings...

...First, the firms' economy would improve...

...Most are profitable enterprises...

...employees were polled for recommendations for the five outside slots...

...No one needed a crystal ball to see that a shutdown was looming...

...The few studies that differentiate between participatory and nonparticipa-tory employee-owned companies suggest that the former outperform the latter...

...Unlike the UAW at Seymour, the union at Mansfield did not take an active role in the buyout...

...Fifteen years ago, employee ownership was virtually unknown in the United States...

...For all the similarities, significant differences separated the Seymour and Mansfield operations...

...Both had been founded in the 1880s, and had been family-owned and operated...

...as a captive supplier, the Mansfield plant had found it difficult to hold outside business, since such work had to be shunted aside to fill orders from the parent company...

...The Seymour plant was owned by National Distillers, a conglomerate with major liquor and chemical operations, and the Mansfield plant by Harvey Hubbell, Inc., a Connecticut-based supplier of electrical products...

...Still, the flexibility of ESOPs, which is part of their appeal, permits a variety of maneuvers more beneficial to managers than to other employees...

...Both management groups were certain their plants would do better as independent, employee-owned firms than they had as parts of conventional conglomerates...

...When organized labor takes the initiative, as the UAW did at Seymour, the union is institutionalized in the structure of employee ownership...

...An example was the leveraged buyout of Dan River, a Virginia textile firm: Twenty-six managers paid about $2 a share for their stock while ESOP shares cost $22.50 each...

...Studies indicate that workers tend to care far more about influencing conditions on the shop floor than in serving on the board, and that participation at the plant level (which can exist without voting rights) makes a greater difference in company performance than participation in the board room...

...Employee ownership clearly poses problems for unions...

...ESOPs owe their popularity not only to their tax advantages but also to their flexibility...

...employee ownership made sense even if it required wage concessions...

...this, in effect, permits tax-free retention of earnings—but in the hands of employees rather than previous stockholders...

...Employment has grown to 190, including fifty nonowners whose implicit wage concessions are not rewarded with capital accumulation...

...Without new capital investment, plants soon cease to be competitive and go into decline...

...At some 900 of these firms employing at least half a million, workers hold a majority interest in the business...

...But democracy is possible...

...The tax advantages that have stimulated the growth of worker-ownership can occasionally produce embarrassing results...

...Subsequently, management moved a part of production from South Bend to South Korea...

...Employee Ownership as an Alternative to Plant Shutdowns: The Ohio Experience," available at $9.95 from Kent Popular Press, Box 715, Kent, OH 44240...

...MFC broke even during its first year-and-a-half while meeting its interest and principal payments, despite growing import penetration from Brazil, Taiwan, and South Korea...

...The employee holdings, which are generally proportional to their wages (though shares may also be allocated equally) first become taxable when they are cashed in on retirement or resignation...

...their representatives are likely to face a united front of shareholder representatives on key issues...

...In the Mansfield case, important public support was also provided through Ohio's "linked-deposits" policy, which offered the lenders state compensatory deposits at low interest rates...

...Employee ownership has produced both symbolic and tangible changes...

...Half a century ago, the dominant form of manufacturing enterprise was the owner-operated plant, in which the owner's fate was inexorably linked to the fate of the work force...

...A recently completed NCEO study found, for instance, that the most participatory ESOP companies grew each year at a rate that outpaced the least participatory firms by 12 per cent...

...A few plans are so severely skewed to favor management that Business Week calls them MESOPs—Management Enrichment Stock Ownership Plans...

...The idea wasn't un-American—what could be more American than owning the place where you work?—but it just wasn't something we did over here...

...A less obvious factor in the success of worker-owned firms is their operating style, which tends to differ dramatically from the way conventional firms do business...

...The share held by the company's chief executive officer is identical to that of any production worker...

...Under the tax provision, ESOP participants' holdings are increased by retained earnings as well as company contributions...

...Vacations were reduced from five weeks to two...

...Employee owners at both Seymour and MFC are enjoying success...

...They become an investment in the future...

...The shop-floor members represent each of the work areas and are elected by all the employees (including nonowners) in their area...

...Worker-ownership plans were designed as financial-benefit programs for employees, not as means of achieving worker control...

...With the centralization of ownership— the top 1 per cent of manufacturing corporations control 90 per cent of industrial assets—capital mobility has increased dramatically...

...But while $9 million went directly into the ESOP, the remaining $27 million, which was committed as collateral for a $ 120 million loan to management, was to be paid into the ESOP (without interest) over ten years...

...The standard grievance process has been maintained, providing the traditional protection for workers against management abuses...

...The company also holds quarterly shareholder meetings for its 230 worker-owners, and 90 per cent of its employees turn out for the annual meeting...

...it represented all Ohio Brass workers, including the 100 whose seniority enabled them to transfer from the foundry to the remaining insulator plant, and it did not want to precipitate a general wage cut...

...National Distillers decided to dispose of its sixteen metal-industry plants, which were profitable but not profitable enough to please the owners...

...They anchor capital in the community...

...The case of Eastern Airlines illustrates the point: Unionized employees had agreed to wage concessions in return for 25 per cent of the company's stock and a corresponding number of board seats...

...The most prominent worker-owned company in the country, Weirton Steel, is also the only profitable integrated steel-maker...

...The Department of Labor is currently suing two companies for egregious abuse of ESOPs...

...In Mansfield, the effort was led by John Rhoads, the retired manager of the foundry, and Jack Pollock, who had worked for Ohio Brass for twenty-five years, as had his father and grandfather before him...

...It paid a profit-sharing bonus after its first six months and restored the wage cut at the end of its first year...

...They have done so more rapidly by retaining earnings that otherwise would have gone to distant corporate headquarters...

...The climate of labor relations is held to be excellent by both Drescher and UAW local president Mike Kearney...

...Steelworker locals have recently engineered employee purchases of two profitable subsidiaries of LTV Steel (Republic Container in Nitro, West Virginia, and Republic Storage Systems in Canton, Ohio) and are in the process of buying E. W. Bliss, a major manufacturer of rolling-mill equipment in Salem, Ohio...

...Workers may have articulate representation on a board of directors without exerting much real influence...

...The UAW local's strong position stems in part from the fact that it initiated the buyout...

...By way of contrast, the Machinists' Union local was decertified at Mansfield...

...Both MFC and Seymour have opted for profit-sharing plans...

...From a traditional business perspective, worker-owned companies seem to be doing well...

...Mansfield's management faced more of a struggle...

...In these cases, the union has taken the initiative to prevent sales to anti-union companies or disinvestment, and employees will end up with influence commensurate with ownership...

...A second essential component was the use of the ESOP structure to provide tax advantages for the banks doing the lending...

...their owners' first interest is in keeping their jobs, not in maximizing their profits by moving the plant to Taiwan...

...It had been built as a captive supplier of the castings for porcelain insulators and other electrical products manufactured at Ohio Brass plants...

...Bridgeport Brass's wire mill in Seymour was the community's second-largest employer, and Ohio Brass, a dominant force in supplying insulators, suspension hardware, and other equipment to electrical utilities, was one of the flagships of Mansfield industry...

...Moreover, employee ownership has turned around a number of companies that would have been written off under conventional business standards...

...New hiring is done by the blue-collar personnel committee from a pool nominated by employee-owners...

...The distribution formula calls for 30 per cent of the bonus pool to be distributed equally among all owners, salaried and hourly...

...The executives at National Distillers and Harvey Hubbell knew how to make money...

...Each has an unemployment rate higher than the state average...

...The financial package they eventually put together involved loans from the parent company, three banks, and the 142 employees who agreed to participate...

...Employee-owned companies tend to offer workers more opportunities to participate in decision-making...

...Among the pioneers have been the Steelworkers, whose wage-policy committee has endorsed the concept, particularly in response to company requests for wage givebacks...

...That has changed...

...But by the mid-1980s, they had passed into the hands of outside owners...

...Though they sit on opposite sides of the bargaining table, Drescher and Kearney sit together on the board of directors...

...ESOPs may also borrow to acquire stock...

...It has four inside directors (two from management and two from the shop floor) and five outside directors...

...As the companies pay down their loans, they create employee equity...

...The right to elect company directors need not be granted to employees through their ESOP holdings (although firms may grant it if they choose...