Gettelfinger in the ESOP pie?

180px-the_boy_who_cried_wolf_-_project_gutenberg_etext_19994.jpgChrysler’s future looks increasingly precarious. Union President Ron Gettelfinger has a tough call to make. He may be able to disrupt progress towards a takeover. Or he may soften the Union’s stance over pension rights with the parent company. But that makes Chrysler a more attractive morsel for a predator. ESOPs offer a possible way forward.

The financials make gloomy reading. Chrysler made a $1.5bn loss last year as its US sales deteriorated. Kirk Kerkorian has tabled a $4.5bn offer. Magna is believed to be considering making a marginally better offer. Parent company Mercedes Benz faces 90% loss of the $40bn it paid for Chrysler in 1998.

How ESOPs may be the way forward

An ESOP (Employee Share Option Plan) is an old idea that has found recent favor in Private Equity deals. In principle, an ESOP is a form of worker incentive through participative ownership. As such, it has a distinctly liberal or (dare I whisper the word?) socialistic ethos. Strange, then, that such an idea would be popular in that most red-blooded of capitalistic barbarians at the gate, the private equity consortia.

Unsurprisingly, The Economist takes a mildly cynical view:

If all else fails, hand the workers some equity. That seems to be the new philosophy of America’s private-equity firms, at least, judging by the bidding war for Chrysler [and The Tribune Newspaper]. ..
Anyone seeking in this the spirit of Robert Owen, the father of the workers’ co-operative, or of Louis Kelso, an American lawyer who invented the ESOP in 1956, is likely to be disappointed.

When Daimler bought Chrysler in 1998, it paid $35 billion. Analysts now value it at no more than $8 billion, though Daimler may be fortunate to get anything close to that for a business that some experts think is destined, sooner or later, for bankruptcy, along with Detroit’s other giant car manufacturers, Ford and General Motors.

On April 5th Tracinda, the investment vehicle of Kirk Kerkorian, a buy-out veteran, offered to pay a paltry $4.5 billion for Chrysler .. Mr Kerkorian’s offer assumes that Daimler will retain some of Chrysler’s crippling health-care and pension liabilities and that the firm’s employees will take a big chunk of equity in exchange for giving up some promised benefits.

Overall, ESOPs seem to improve the performance of firms that have them, which may explain why they are increasingly popular. Some 10 million American workers are members of ESOPs, which together control assets worth an estimated $600 billion. However, it is less clear that they help firms in upheaval or confronting possible failure–such as Tribune and Chrysler.

The Economist argues that the move is more based on financial engineering than on the kind of social engineering required to harness the energies of the workforce towards competing globally, and contributing to a change of fortunes of Chrysler, (and by the same token, GM and Ford). In contrast, the rise and rise of the Toyota phenomenon (Toyataoism) is based on production and social innovation.

The view is one shared by those of more leftist disposition, typified by the following quote. I jotted it down from a lecture by a distinguished social scientist who was discussing worker participation schemes: ‘Scratch an enlightened employer, and not far below the surface you will find an unreconstructed exploitative capitalist’ .

But for all the mistrust, the workers at Chrysler may see such deals as offers they can’t refuse. To them, this is far more than an experiment in financial engineering. Magna, with its track record of employee share ownership, could have the better prospect in that respect. The almost forgotten third way of Kelso may attract more advocates.

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2 Responses to Gettelfinger in the ESOP pie?

  1. Norm Kurland says:

    What’s missing in the Detroit automakers crisis is what some call Justice-Based Management, and corporate leaders and UAW leaders who are open to creating an ownership culture, using the tools invented by Louis Kelso. You can check out the philosophy and some applications of Justice-Based Management at http://www.cesj.org/jbm/whatisjbm.htm. See especially what went wrong in the article on South Bend Lathe, which caused me as Kelso’s chief architect of that unprecedented turn-around of a unionized company two months from liquidation to develop the elements of this new bottom-up leadership philosophy.

    It would help for Ron Gettlefinger to read the words of the late great UAW leader Walter Reuther (who embodied the Justice-Based Management philosophy) in his 1967 testimony before the Joint Economic Committee of Congress:

    “Profit sharing in the form of stock distributions to workers would help to democratize the ownership of America’s vast corporate wealth which is today appallingly undemocratic and unhealthy. The Federal Reserve Board recently published data from which it is possible to estimate the degree of concentration in the ownership of publicly traded stock held by individuals and families as of December 1962. Preliminary analysis of these data indicates that, despite all the talk of a “people’s capitalism” in the United States, little more than one percent of all consumer units owned approximately 70 percent of all such stock. Fewer than 8 percent of all consumer units owned approximately 97 percent—which means, conversely, that the total direct ownership interest of more than 92 percent of America’s consumer units in the corporation-operated productive wealth of this country was approximately 3 percent. Profit sharing in a form that would help to correct this shocking maldistribution would be highly desirable for that reason alone.… If workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm’s products, profit sharing as such cannot be said to have any inflationary impact upon costs and prices.” [Testimony before the Joint Economic Committee of Congress on the President’s Economic Report, February 20, 1967.]

    I worked as director of planning for an organization chaired by Reuther, the Citizens Crusade Against Poverty, got Kelso and Reuther together, and later served as Kelso’s Washington Counsel and head of his Institute for the Study of Economic Systems. You can scan through our website at http://www.cesj.org for seeing how Kelso’s ideas can be applied for solving many problems that cannot be effectively addressed within conventional economic paradigms.

    Hope to hear from you.

  2. Tudor says:

    Thanks for this,

    I’m looking forward to learning more about the ideas you touch on, and hope thy will influence future posts.

    Among my early mentors at Manchester Business School in the 1970s-1980s were Tom Lupton and Enid Mumford who were influential in the UK in developing ideas of more democratic and ethically sound working practices. They seem in harmony with your proposals.

    http://www.word-power.co.uk/books/on-the-shop-floor-I9780415279901/

    http://www.enid.u-net.com/

    One of the few consolations of the current global economic turmoil is that more attention may be given to such models.

    Warmest regards

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