PROPOSED DEAL FOR UNITED AIRLINES : Worker-Owned Firms Are Often Successful; Key Is Participation
When Hospital Corp. of America sold 10% of its hospitals to an employee group in 1987, many analysts thought that the workers were being handed lemons. But if the hospitals were a lemon, the workers made lemonade.
The new company, Healthtrust Inc., gave local hospital managers more autonomy to transfer equipment among the hospitals and to implement other efficiencies, resulting in a $50-million cost savings in the first year, according to Corey Rosen, executive director of the Oakland-based National Center for Employee Ownership. Today, Nashville-based Healthtrust is regarded as sound enough to attract a more favorable rating for its bonds than those of HCA, Rosen said.
Not all employee-owned companies are successful. Those that start with an inherently sound business and not only transfer ownership to the workers but give them a bigger role in running the company have fared best, according to experts who monitor worker-owned firms. They also have quickly begun returning profits to their employee proprietors in the form of cash or stock.
And while the employee buyout of UAL Corp. announced Friday dwarfs past worker purchases if it is completed--it is three times bigger than the next largest buyout--analysts say the experience of the fewer than 1,000 companies owned mostly by their workers clearly maps the path to successful employee ownership.
The best employee-owned companies are those that “have combined employee ownership with a lot of employee participation,” Rosen said. “It’s not really a question of board-level representation, but participation in day-to-day management.”
Critics of the fast-growing phenomenon of employee ownership say many of the plans are designed to insulate management and take advantage of tax benefits rather than give genuine control to workers.
But the mere fact of owning a share of one’s company in itself is a boon to employees, insists Louis O. Kelso, the San Francisco investment banker who developed the modern employee stock ownership plan. “The idea is to enable people to equip themselves with capital,” Kelso said Friday. “Capital works for its owners. But most people don’t own any.”
Employee ownership does not “automatically lead to increased productivity and profitability,” said Joseph R. Blasi, an employee ownership analyst at Rutgers University’s Institute of Management and Labor Relations. Employees have increased expectations about their involvement in the company, he said. Those expectations may be frustrated if the company does not adopt a team approach to problem-solving, he said.
Overall, more than 10 million American workers own some part of more than 10,000 companies. As a whole, research shows that these companies have been as financially successful as firms in comparable businesses that are not employee owned, Blasi said.
The following is a brief review of the experience of some well known employee-owned firms:
* Hyatt Clark Industries is no more--killed by labor strife and foreign competition. The 100% worker-owned company was formed in 1981 when Clark, N.J., workers bought their unprofitable automotive bearings plant from General Motors. For a time, the company appeared to be thriving, attracting new customers and new product lines to make a modest profit in 1983. But workers were never fully involved in management.
In 1984, the workers, who had initially taken a pay cut, wanted a raise. Management thought the money should be reinvested in the plant. A work slowdown occurred at a time when foreign competitors slashed prices. Eventually its last customer, General Motors, declined to renew its contract. The company filed for bankruptcy and was closed in 1985.
* Weirton Steel--dramatically rescued by workers in 1984 when the domestic steel industry collapsed--has been profitable every quarter since the workers took over. That record of stability is unmatched by any of its competitors, according to John C. Tumazos, an analyst with the investment firm of Donaldson, Lufkin & Jenrette in New York.
“The ability to remain profitable in the difficult years since 1986, the ability to win new customer accounts, to improve product quality and improve costs are all important attributes that employee ownership has contributed to,” Tumazos said of the 7,900-worker West Virginia firm.
Weirton’s peak year as an employee-controlled firm was 1988, when profit reached $150 million, and half of that total, $75 million, was distributed in stock to employees. The firm’s performance, even in down markets, has been so strong that Weirton was able to go public last year, selling about 23% of its shares to help finance a five-year, $740-million capital improvement plan.
Tumazos credits the success in part to good management and in part to Weirton’s specialization in tin-plate, the material used in food cans, and hence a relatively stable business. But, he adds, without employee ownership, Weirton “would not be in business today.”
* Avis Inc., the rental car company, has made employee ownership a marketing tool, inviting customers to step up to airport counters and do business with an owner of the company.
The traveling public has responded. Avis remains No. 2 but--with roughly 27% of the rental-car market--the Garden City, N.Y., company is bearing down on industry leader Hertz.
And workers have gotten to exercise their new role as proprietors, meeting with top managers on the first Thursday of every month to discuss ways to improve Avis’ performance.
The company’s officials say the benefits of employee ownership are clearest in the area of service.
Employee owners, who know their return on the buyout depends upon customer satisfaction, have improved lost-and-found procedures, helped design innovative check-in systems and figured out how to make it easier to find cars in airport parking lots.
The payoff: Service complaints dropped 35% in the year after Avis’ 1987 employee buyout and have fallen every year since.
OWNING THE COMPANY
The largest companies majority owned by employees, ranked by number of employees.
Ownership Company Employees began UAL Corp.* 71,000 1990 Chicago Publix 61,000 1930 Lakewood, Fla. Healthtrust 30,000 1987 Nashville, Tenn. Avis 13,000 1987 Garden City, N.Y. Science Applications 11,000 1973 La Jolla EPIC Healthcare 10,000 1988 Irving, Tex. Parsons Corp. 8,000 1985 Pasadena Weirton Steel 8,000 1984 Weirton, W. Va. Avondale Shipyards 7,000 1986 New Orleans Wyatt Cafeterias 6,500 1989 Dallas Austin Industries 6,000 1987 Dallas
*Proposed
Source: National Center for Employee Ownership
