VIEWPOINTS : ESOPs EMPLOYEES TAKE STOCK IN THEIR COMPANIES : Amid the controversy, employee ownership is booming. There are more than 8 million employees in 8,000 ESOPs across the country.

Employee ownership is growing rapidly in the United States and has become an important factor in how businesses are bought and sold and protected from takeovers. When put to its proper use, employee ownership is a powerful tool for inspiring commitment and entrepreneurship among all workers. It also can provide employees some financial security and job protection.

All too often, however, employee ownership is abused by managers who exploit it for their own purposes. They may use the major vehicle for employee ownership in this country--trusts known as Employee Stock Ownership Plans, or ESOPs--only to win tax benefits in financial dealings. Or they may use ESOPs to fend off takeover bids.

In either case, these managers often prevent what employee ownership was principally intended to do--to give workers more say and more of a stake in the direction of their companies.

The issue of abusive ESOPs was raised anew last month in the effort by Shamrock Holdings, a Burbank company owned by the family of Roy E. Disney, to buy instant photography giant Polaroid. Shamrock has gone to court to prove that Polaroid’s new ESOP, which was given 14% of the company’s stock, exists simply to thwart a takeover.

Amid the controversy, employee ownership is booming. There are more than 8 million employees in 8,000 ESOPs across the country. About 2,000 companies are majority or fully owned by employees and several thousand more are 20% to 50% employee-owned.

According to the National Center for Employee Ownership in Oakland, the funds spent on leveraged buyouts financed through ESOPs climbed from $1.2 billion in 1986 to $5.5 billion last year, when employees acquired Avis and Health Trust hospitals in billion-dollar-plus transactions.

Developed by San Francisco investment banker Louis Kelso, ESOPs gained steam with the support in the 1970s of Louisiana Sen. Russell Long, who passage of laws that provided tax incentives to put company stock into the hands of employees. Today, these tax incentives both help ESOPs borrow money to buy stock and encourage companies to contribute cash and shares to the trusts.

The good ESOPs surface in many places. Most are set up at successful small- and medium-sized firms where the owner wants to retire and cannot find anyone to continue the business. By selling the firm to an ESOP, the owner can get his cash out. For their part, workers can keep their jobs and build up a nest egg, perhaps for retirement.

Big, successful companies such as Federal Express also have set up ESOPs as part of their employee benefits packages.

Elsewhere, failing firms or subsidiaries have been bought through ESOPs and then rescued by the employees. A leading example is Weirton Steel of West Virginia. These deals have been criticized as a government-subsidized way to dump sick companies onto unsuspecting employees but only 4% of ESOPs are set up for turnarounds, and most of them succeed.

Unions are aggressively using ESOPs to protect jobs in an unpredictable economy. American Capital Strategies, an investment bank, put together a $420-million offer for Robertshaw Controls two years ago for the United Steelworkers and the United Auto Workers in an unsuccessful attempt to thwart an unwanted suitor.

United Airlines’ pilots, meanwhile, continue with a bid to buy their company. Even disaffected managers and workers in non-union companies are beginning to hire investment bankers and lawyers to use flexible ESOP corporate finance to defend their interests.

And then there are the bad ESOPs. Many closely held and publicly held companies set up the trusts, borrow money to buy stock or the whole firm and then deny employees real voting rights.

Unionized employees are frequently excluded from such plans, and the stock often is allocated so that highly paid employees have disproportionate control. Despite research showing that companies that combine employee ownership with employee participation improve their economic performance, many firms do little to encourage a greater role for their workers.

One of the worst cases came in 1983 at Dan River Inc., where workers were frightened about a takeover threat from Carl C. Icahn. They responded by voting to scrap their pension plan and taking the company private with an ESOP. Icahn was stopped, but the workers later were disillusioned to find out that they had won little influence in the company and that it was crippled financially by the buyout.

The courts may decide whether Polaroid also proposed an ESOP simply to avert a takeover. If Polaroid has not made firm provisions for employee control, participation and labor-management cooperation, its ESOP is unlikely to survive Shamrock’s legal challenge.

All the same, ESOPs figure to become more and more common as takeover defenses. They will buy time for managers who are trying to figure out how to adapt to the increasingly unpredictable and daring takeover market.

Nevertheless, there is hope for those who want ESOPs to follow the spirit, not just the letter, of federal law. Thanks partly to legal challenges, companies such as those hoping to use ESOPs as takeover defenses increasingly will be pressured to set them up before any actual takeover bid emerges.

Beyond that, they will be pushed to weave the trusts into a more participatory corporate culture.

What does this all add up to for American capitalism? Growing employee ownership, the kind that gives workers a genuine role in management, might just be the tonic our companies need to improve their competitiveness. As Corey Rosen, director of the National Center for Employee Ownership, says, “ESOPs can be and are abused, but they are measured against a higher standard than other forms of corporate ownership. On the whole they have been an extraordinary innovation that has improved economic justice and provided an opportunity to improve economic efficiency at the same time.”