One ($5 Billion) Promise Too Late

April 29, 2009 at 5:05 pm (By Maxwell James)

Nearly lost in yesterday’s hubbub over swine flu and pork traders was the most recent update on the auto industry’s flailing. Apparently Chrysler, in one more last-ditch effort to avoid bankruptcy, will now be 55% owned by the UAW in exchange for renegotiation of workers’ pension funds. I find this decision rather sad.

It’s not widely known, but for a brief period in the early 1980’s Chrysler actually had an employee stock ownership plan (as did the other members of the Big Three, IIRC). Corey Rosen, head of the National Center for Employee Ownership, tells the story of its arrival and demise. Basically, the union never really got behind the concept, and demanded the company buy the stock back in 1985. The size of the plan was $162 million at its inception in 1981 – then 16 percent of the company’s value at the time- and each employee received $8200 when it was ended, roughly $16,000 in today’s dollars.

Now, look at the numbers today. 26,000 employees get 55 percent of the company in exchange for relinquishing $5 billion in retirement benefits. But Chrysler isn’t worth $5 billion right now – in fact, it probably isn’t worth $1 billion (hard to say, since the company is majority owned by a private equity firm, but its peer GM has a market cap of $1.12 B right now, and is a larger company).

So at the very best, that 55 percent equity stake is worth $500 million or so – basically as much as what they sold their 16 percent for over two decades ago. And that’s without looking at the lost retirement benefits. By any standard, this is not a very good deal for the automotive workers, and its chances of saving the company at this point are slim.

It’s pointless to gripe about what might have been, but it’s hard not to wonder whether things might be different now had Chrysler’s ESOP not been dissolved. As this article points out regarding GM, the right employee ownership plan could have offered one way of proactively bridging the gap between management and labor with regard to retirement benefits and salaries. There is also a small but growing body of research demonstrating a positive correlation between corporate performance and employee ownership, especially when paired with open management practices.

I believe that the future of the labor movement – and it does have a future – will be based on fostering employee ownership and workforce development. But this particular example has probably come far too late.

~ Maxwell

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4 Comments

  1. amba12 said,

    This is an enormously valuable perspective that most of us know too little about. Thanks for putting it here — I look forward to learning more.

  2. PatHMV said,

    While I generally support some form of ESOP, most financial advisers I know strongly advice AGAINST having the bulk of your retirement funds invested in your employer. If the employer tanks, then suddenly you lose your job AND your life savings. Look at the $16,000 the employees received in 1981. On Jan. 2, 1981, the Dow Jones Industrial Average was 972.78. Yesterday it closed at 8185.73, an increase of 841%. While the average car worker probably wouldn’t have managed to parlay that $16,000 into $13.5 million today, that’s what would have happened just investing in a nice DJ tracking fund (not accounting for trading costs and taxes)…. While 55% of the company today, divided among all the employees, isn’t worth nearly as much.

  3. amba12 said,

    It strikes me that those who perpetuate management/labor antagonism and opposition of interests act as if they are still trying to fulfill Karl Marx’s prophecy, or analysis. It’s also an offshoot of measuring success only quantitatively. Success is quantitative or it’s nothing, but when profit and shareholder value are all, quantitative success is won at the expense of “externalities” — or are they “internalities” — like worker quality of life, security and loyalty … It strikes me that the antagonism has to go somewhere, and that companies like Google that strive to do well by their workforce (“Don’t be evil”) turn it outward, against the competition; they become like walled medieval fiefdoms at war for monopoly. Very random, naïve observations.

  4. Maxwell said,

    Pat, while I don’t have time to look up the link right now, even the NCEO does not recommend ESOPs on the basis of funding worker’s retirements – such funds lack even the most basic diversification and are therefore extremely risky (see Enron for a dramatic example). The Kelso Institute’s recommendation is based on the highly specific nature of the big 3’s systemic problems, which aren’t at all generalizable to other companies. But that also goes to show why the union wasn’t interested in building employee ownership until the last bridge had been burnt. That was shortsighted of them, in my opinion.

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