Worker-Owners and Unions
You have probably heard the story of the scorpion that convinces a frog to carry it across a river. Halfway across, the scorpion stings the frog, which means both will drown. The frog does not understand; the scorpion explains, "I couldn't help myself. It's my nature."
In the abstract, worker-owned enterprises and labor unions would appear to have much in common. Both share the goal of improving pay and working conditions. Both aim to give workers a say in the workplace. And both belong on any progressive's short list of strategies for building a more just economic system.
But when unions and worker-owned businesses actually interact, they sometimes act more like the fabled arachnid.
The Ohio Employee Ownership Center at Kent State, where I work, provides preliminary technical assistance on worker buyouts. I once met with a group of employees exploring a worker buyout of a failing paper mill in southwest Ohio. When I asked them why they thought they would do any better, they gave me an example. Pointing to a large machine, they explained that it broke down regularly, resulting in lost production. Any repairs they could make were only temporary, until permanent replacement parts could be installed. They went on to explain that the mill had been bought and sold three times over the past two years. Two owners ago the parts had been purchased, but they were still sitting in a storeroom. When these employees became the owners, they were going to install the parts.
But would the workers really cooperate with management as employee owners, and would management really cooperate with them and empower them to make decisions and act independently? Or, as with the scorpion, were the decades of confrontational labor-management relations so engrained in the nature of both groups that they would sink their own company? In that instance we'll never know, because the buyout effort did not go forward.
Worker-owned businesses can take a variety of forms, from full-fledged worker cooperatives to companies whose structure and management practices are indistinguishable from ordinary capitalist firms except for the fact that their employees own some or all of the company's shares (see "The Many Forms of Worker Ownership."). Because most of the manufacturing companies where worker buyouts have been used to avert plant closures were unionized, unions have had to grapple with reshaping their role in this new context.
While unions and worker-owners share many aims, there are also profound differences. True cooperatives address working conditions through direct democracy at the company level. Members have the right to participate in making decisions on matters such as compensation and business planning. Co-op members do not like being restricted in their decision-making by factors external to the cooperative—even factors like industry-wide collective bargaining agreements. When co-ops interact with other co-ops, they typically form secondary cooperatives controlled by the member co-ops, which run them to serve their common needs. One might say that co-ops tend toward decentralization.
In contrast, unions depend on numbers to build their strength. They need to maintain a degree of discipline among their locals, insisting on relative uniformity around key issues. Unions' most effective strategy for bringing about changes in the workplace is the collective refusal to work. If the central leadership cannot count on each local to follow its direction, the threat of a strike loses credibility. Thus, unions depend on centralization in order to create enough power to offset that of the owners.
Why Worker-Owners Need Unions
Moreover, union representation might seem to be superfluous for worker-owners, who after all are supposed to have decision-making authority by virtue of being owners. Most ESOPs are not structured so as to give workers significant decision-making authority. But even in the most democratic ESOP, a union can have an important role to play. One way to look at the role of unions is to observe the balance of power that exists between the three branches of government in the United States. The legislative branch makes the laws, as the board of directors in a company sets policy by which management must manage. The executive branch implements or executes the laws on a daily basis, as management runs the day-to-day operations. Even in those ESOPs where the worker-owners have the right to participate in electing the board of directors, that right does not protect any individual employee from the power that management enjoys to hire and fire, for example. Just as the judicial branch protects individual citizens from the misuse of power by an executive, the union protects individual workers from the arbitrary use of power by management.
Collective bargaining is another role that unions play. A union can help worker-owners to assess their situation in the context of industry-wide working conditions and compensation practices. And via the union, information flows both ways. In a cooperative or an ESOP practicing so-called open book management, the employees have full access to the company's financial information. With such transparency, the union negotiating team does not have to guess about what the company can afford; it has the information required to calculate what is available for compensation. Using this as a frame of reference, the union is also in a better position to bargain for strong agreements throughout the industry.
Access to group rates on benefits like health insurance or multi-employer pensions can be another advantage that unions bring, especially in the case of cooperatives, which tend to be much smaller than ESOP companies.
Unions also bring a ready-made communication structure, which can be helpful in building an ownership culture among workers who are accustomed to having little say in the business.
Some of the positive synergies between union representation and worker ownership were at play in a Toledo textile firm. In 1991, GenCorp was planning to close down an unprofitable division, but instead agreed to sell it to the 200-plus employees as Textileather. The Amalgamated Clothing and Textile Workers Union (ACTWU) supported the buyout and joined with management in building successful employee participation. Training in participatory practices was implemented from the beginning, and an effective jointly led employee involvement structure resulted in a 28% increase in productivity, a 40% drop in scrap, and greatly reduced machine downtime in the first year. The company was immediately profitable. Ultimately, though, Textileather's worker-owners decided that their primary goal was job security, not ownership. In 1996, when the acquisition debt was paid off, management and workers agreed to sell the company. The buyer not only paid 160% of the valuation price, but also agreed to increase wages, bring in additional work creating more jobs, and give the employees the first right of refusal if it decided to sell the plant in the future.
At another worker-owned firm, an initially strong union-ESOP relationship failed to prevent a breakdown of the worker-ownership structure. Republic Engineered Steels' 4,500 employees, spread among eight plants in four states and primarily organized by the United Steelworkers (USWA), chose to buy their division from steel giant LTV in 1989 to avoid a shutdown. The new contract defined a structure for employee participation: Work groups would meet regularly to identify opportunities for change. They could implement actions that affected only their area; other proposals would be kicked up to the department level, the plant level, and in some cases to a corporation-wide joint labor-management committee. To get this structure to work, 100 managers and their corresponding 100 union representatives trained jointly for a week to become co-facilitators. Union and management also formed a joint committee to direct the ownership training program.
With a solid foundation of worker-owner participation, the company successfully cut $80 million out of its annual $800 million expenses in only 18 months—not by cutting compensation, but by implementing employees' ideas for improving operations.
Two events changed the picture. First, to provide equity for the buyout, employees had agreed to roll over $20 million from their LTV retirement plan in exchange for preferred stock that paid annual dividends at 16%. In order to retire this expensive debt, management convinced the employees to let the company go public. But management miscalculated the price the shares would obtain, disappointing the workers and shaking their confidence in company leadership. Furthermore, in an attempt to enhance the company's reputation with its new outside shareholders and raise its share price, management became less sensitive to the priorities of its worker-owners.
Then, in the late 1990s the price of steel took a deep plunge. Instead of responding to the crisis by taking advantage of the participatory structures that had so methodically been created, management fell back on its traditional MO, implementing changes with no worker input. When management made plans to open a new plant where it could get the most concessions from the local government—a decision that would have put many of its Massillon, Ohio, worker-owners on the street—the union became so frustrated that it sought out an investor to buy the company, giving up ownership in order to dislodge an entrenched management.
Unions have other ways of getting management's attention, short of selling the company. Some choose the traditional union weapon: the strike. In 1998, the worker-owners at the 100% employee-owned Republic Storage Systems, represented by the Steelworkers, chose to go on strike, ostensibly over a few pennies. In fact, this was their way of expressing a vote of no confidence in the CEO. Soon after, the CEO did resign, and the employees found a new leader they were prepared to follow. In fact, in 2003, when the entire plant was severely damaged by a flood, employees came in on their own time to clean up the plant.
THE MANY FORMS OF WORKER OWNERSHIP
The term "worker ownership" can describe a variety of business structures. At one end of the spectrum, the worker-owned cooperative model rejects the very notion that capital should control the business and enjoy an unlimited return. To the contrary, as political economist David Ellerman describes it, in the cooperative model labor hires capital, governance is based on membership in the firm, and the return to capital is limited. As a result, investors are not easily attracted. Workers themselves typically have little capital to invest. So co-ops are rarely found in capital-intensive industries; most of the 400 for-profit co-ops in the United States are in labor-intensive service industries, which do not require expensive tools.
Another model involves direct worker ownership of voting stock. Unlike the cooperative, this model accepts the capitalist system but rejects the capitalist. Here, the workers accept the assumption that control and profits should be allocated according to the number of shares one owns, but reject absentee ownership of shares by those who do not work at the firm. Only a handful of worker- owned companies are structured this way because workers typically lack capital to invest and are averse to risking the little they may have.
By far the most common structure of worker ownership is the Employee Stock Ownership Plan, or ESOP, which has been used in over 11,000 U.S. companies since first being written into legislation in 1974. About 9,225 ESOPs are active today, according to the National Center for Employee Ownership. ESOP participants often share ownership of the company with large investors. Moreover, in most companies with ESOPs the worker-owners not only accept that capital, not labor, has the right to govern the business, but also allow someone else to vote their shares of that capital.
The ESOP itself is a trust that receives tax-deductible retirement contributions from the company. Two characteristics set ESOPs apart from other retirement plans, such as 401(k)s. First, ESOPs are not only allowed, but required, to invest a majority of their assets in the employer company's own stock. Second, an ESOP can borrow money to acquire stock, releasing shares to individual participants as future contributions are made. While employees may not possess credit, cash, or collateral, the ESOP provides a vehicle for the sponsoring employer to fill this gap with the credit, cash, and collateral of the company itself. In other words, ESOPs provide workers with a tax-advantaged structure for financing the acquisition of their company.
The legal owner of the capital is the ESOP trust, overseen by a trustee appointed by the board of directors. In managing the ESOP's assets, under current law the trustee is allowed to consider only the workers' interest in increasing the value of their retirement holdings—not their interests as employees with concerns such as job security.
While worker buyouts to avoid shutdowns account for only about 3% of all ESOPs, a majority of these are companies with union representation prior to the buyout. Without the leadership, structure, and protection afforded by a union, employees generally cannot build common cause quickly enough to present themselves as viable buyers, before machinery has been moved out and customers turned away.