EMPLOYEE STOCK OWNERSHIP IN ECONOMIC TRANSITIONS: THE CASE OF UNITED AIRLINES

This article argues that employee stock ownership transactions (ESOTs) may have decisive advantages in addressing the transition problems associated with significant economic change. Equity ownership by employees can increase value not only because of the better incentive alignment achieved by making employees major stockholders, but also because equity has special value in solving some of the bargaining (i.e., information) problems that can make it especially difficult to renegotiate the em-ployees' contracts with the firm in volatile economic environments. One important question raised by ESOTs is whether they produce a merely transitional organizational form or a relatively permanent form for managing economic change. Do they amount to simply a set of one-time adjustments of economic claims so that we should expect a reversion back to public shareholder ownership? Or do these transactions produce a durable organizational form that proves more effective in negotiating an ongoing series of transition problems? After a general analysis of the potential advantages of ESOTs in cases of economic transition, this article explores this question by examining one particularly interesting example, the recent employee acquisition of majority equity in United Air Lines. The parties in the UAL transaction, which can be traced to the transition shock of airline deregulation in 1978 and the series of competitive struggles that followed, contemplated employee ownership as more than a transitional device. The deal is structured to lock up employee stock in an ESOP and to provide strong employee governance rights for the next 20 years. One of the objectives of the ESOT was to catalyze a cultural change in UAL's operations so that the airline could become more competitive, not just through wage reductions but through operational efficiencies that would require a higher level of employee cooperation. The evidence to date suggests that UAL has become a more efficient competitor, but also that governance pressure from the employees where their economic interests are directly at stake is potentially destabilizing. The UAL case shows that adjustment to prosperity can raise problems almost as difficult as adjustment to economic adversity.