Lessons from the recent failure of Weirton Steel's ESOP

Weirton Steel's 20-year experiment in worker-ownership ended in bankruptcy May 2003 leaving thousands of workers with worthless stock. Pension promises have since been broken and health benefits terminated. Moreover, under the best case scenario, in which "vulture" investment financier Wilber L. Ross purchases Weirton for a fire-sale price, the mill will provide employment for possibly only 2,000 of its original 8,000 workers.

What is the merit in discussing Weirton's failure?

After all, more than 30 steel companies have failed in the past few years. The merit is that Weirton was a company with a difference, 100 percent worker-owned. It was created in 1984 by its workers in a desperate attempt to save their jobs when National Steel threatened to close the mill.

Workers liquidated their strike fund, raised $500,000 for a study by McKinsey into the feasibility of operating the mill as a worker-owned Employee Stock Option Plan (ESOP), and conceded a 20 percent wage cut and a five-year wage freeze. In return, financiers provided a loan to purchase the mill from National and granted workers three seats on the board and a share in future profits.

On formation in 1984, Weirton's ESOP was the largest in the United States. Moreover, with 100 percent worker-ownership and three worker-directors it was also the boldest. It thus received considerable attention.

Some observers regarded it as an innovative and exciting experiment, others as dangerous. But all wondered if worker-ownership could succeed.

Things looked good initially.

Weirton earned profits of around $500 million between 1984 and 1990, of which workers shared $170 million. The mill also provided 8,000 jobs. Moreover, several observers described the mill's participative practices in glowing terms. Finally, the company completed an initial public offering of its stock on the New York Stock Exchange. At this point, it appeared that Weirton had risen like phoenix from the ashes.Worker-ownership seemed vindicated, and an organizational form found in ESOPs that might revitalize America's rust belt industry.

However, profits turned to increasingly large losses thereafter, $230 million in 1993, $320 million in 2001, and almost $700 million in 2003. Management slashed the workforce by two-thirds and Weirton's worker-owners saw the value of their stock collapse from $14.50 in 1989 to a few cents in 2003.

So what went wrong? Given the apparent initial success, why did profits turn to losses thereafter and what lessons can labor learn from this failure?

Lesson 1: Worker-ownership does not mean worker-control.

Weirton's workers owned 100 percent of the stock but held only three of the 13 seats on the Board. Moreover, the management-worker hierarchy remained in the workplace, along with a management's "right to manage clause." Weirton's workers, though bearing the risk of ownership, thus neither controlled the company strategy nor its operations.

Lesson 2: Weirton's brief period of profitability was party an illusion.

Weirton's profits did not stem from productivity gains unleashed by worker-ownership. Instead, they stemmed from a fortuitous upturn in the market for steel, and in particular from a reduction in hourly wage costs and unsustainably low depreciation and interest expenses.

Lesson 3: Worker-ownership does not turn back the laws of global capitalism.

Weirton's failure was not due to worker-mismanagement. Neither was it due to anarchy in the workplace, emanating from worker-ownership. Weirton failed because of anarchy in the domestic and global markets, a down turn in U.S economic activity 1990 to 1994, and then more crucially, the financial crises in South East Asia (1997) and USSR (1998). Together with an overvalued dollar, these crises caused a flood of imports and a collapse in the price of steel to historic lows that wiped out slender operating margins.



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Lesson 4: Worker-ownership heightens the need for workers to be financially literate.

Accounting principles provide some scope for flexibility that may be used to management's advantage. For example, in 1993, Weirton's management decided to take certain accrued non retirement costs as single charge of around $300 million instead of amortizing a smaller amount over several years.

Worker-owners were unaware of the availability of the option to amortize. Management's decision eliminated profit sharing for the worker-owners and constrained the union during subsequent wage negotiations. However, the single charge facilitated profit sharing for the CEO!

Lesson 5: ESOPs do not mean workplace democratization.

Congress does not require companies devising and using an ESOP to democratize their decision making process. Programs for worker participation, whether in profits or decision making, must therefore, be extracted through negotiation.

Lesson 6: There is no "we" in Weirton.

Weirton's management proclaimed unity of interest between workers and management. Workers were thus supposed to "trust" management, after all "our interests are the same." This was however, rhetoric as illustrated by the following three examples. First, though management called on workers to accept responsibility for their actions, executive management resisted attempts to be held accountable to worker-owners. In fact on occasion executives spent $7 million of the company's funds to purchase insurance that would protect them from the consequences of acts of gross negligence they committed!

Second, during the early 1990s when the company was making losses and workers were being laid off the CEO took a $50,000 raise! Third, while workers toiled for 30, 35, or even 40 years for a pension amounting to perhaps $1,800 per month, a member of executive management with seveb years "service" was given annuities that provided a monthly income of around $18,000 per month! So much for "we"!

Lesson 7: Worker-ownership increases the need for trade unions.

Worker-ownership does not bring about community of interests between management and workers. For example, the traditional management-worker hierarchy continues. Workers thus need protection from abuse associated with this traditional unequal power relationship. However, as noted in lesson 4 above, worker-owners also need strength and voice to extract rights to participation. They also need strength and voice in their relationship as owners, with the company board.

Lesson 8: Shop floor participation distracted workers from truly managing their own company.

Though given extensive publicity by management, worker-owner involvement in participation groups did little to improve profitability. At best, the groups provided a "feel good factor" for a limited number of workers. At worst, and more seriously, they distracted workers from the important business of managing their own company.

Lesson 9: Worker-directors can be lured by the sweet life and trappings of management.

Between 1984 and 2003 Weirton Steel's worker-owners were led by three different union presidents. The first two were co-opted by management as revealed clearly by their work choice subsequent to being defeated when seeking re-election.

The first president, active in negotiations to establish the ESOP between 1982 and 1984, took a management position heading the Company's Employee Involvement Department. He subsequently turned to lobbying.

The second president, active in negotiations to take the Company public on the NYSE in 1989, became, and remains, an attorney for the Company. The cost to worker-owners of their transfer of allegiance by these "leaders" can only be guessed. It is only the third president, Mark Glyptis, elected in 1991, and subsequently re-elected several times, who has remained staunchly true to labor.

John Russell is a professor at the University of Saskatchewan, in Canada, with interests in labor, worker-participation, critical accounting, and organizations. He was previously a member of the Administrative Scientific Technical and Managerial staff union in Britain, and is currently becoming active in the professors' Faculty Association.