Whatever promise an ESOP is supposed to hold doesn't appear to have borne the sweet fruit envisioned in the case of United Airlines' employee stock ownership plan.
The employees' huge equity stake in the airline's parent, UAL Corp., through the ESOP has not enhanced employee morale, improved customer service, or sustained a higher stock price. Right now, pilots are fuming and refusing certain work; customers are furious about canceled and overbooked flights; and UAL's stock price is near its 52-week low.
In the end, the ESOP hasn't inspired ways of easing employee-management conflict. Outside shareholders, looking for some tangible boost from the promise of the ESOP, instead have found a troubled investment in their portfolios. Some promise. The ESOP harvest at UAL has been bitter. ESOPs aren't necessarily the road to a corporate utopia.
But the problems with the UAL ESOP seem to lie in its structure. Other companies considering an ESOP could well learn valuable lessons from the UAL plan. One of the problems with that plan is its elaborate corporate governance structure. As some have pointed out, that includes how the board of directors is constituted.
The board, according to company documents, consists "of five public directors, four independent directors, and three employee directors who are appointed by different classes of stockholders."
In some special circumstances, actions by UAL require approval of 75% of the entire board, including at least one union director, or 75% of the voting stock present at a stockholder meeting. Even after the company's unique governance and voting procedures expire, "employee group representatives can be expected to continue to have the right to elect three directors indefinitely," according to the documents.
Another problem is the ESOP doesn't include all employees. Formed under the company's recapitalization, the ESOP provided a 55% equity and voting interest in UAL to certain employees. These include pilots in the Air Line Pilots Association union and employees in the International Association of Machinists and Aerospace union. The flight attendants stayed out of the ESOP. So all of the employees aren't working with the same compensation incentives.
The biggest losers in the current dispute might be ESOP participants themselves, who not only have the risk of their jobs but also the risk of their equity interest in UAL stock.
Fortunately, the employees are well diversified in their retirement benefits; they have substantial defined benefit and defined contribution plans.
But the key lesson from the mess is: ESOPs are no panacea for all labor problems, or a substitute for a strong board of directors and management to guide the company and for appropriate and diversified compensation and benefits incentives.