Workers to the rescue: can employee ownership keep factories open?
On Oct. 30, 1981, the employees of the New Departure Hyatt Bearings Division of General Motors purchased their own division for $53 million.
If they hadn't bought the company, says Patrick Mazzo, the personnel director , who has 16 years of seniority at the company, GM would have boarded it up permanently.
Because of such considerations, other employees are considering buying their own companies. For example, on Nov. 9, the employees of the Consolidated Railway Corporation (Conrail) wrote Transportation Secretary Drew Lewis, offering to buy the giant rail line. On the same day in New York City, the employees of the Weirton Steel Works, Weirton, W.Va., met with the management of National Steel to talk about buying the Weirton division.
In the past, employees of other troubled steel companies have also talked about buying their own mills, although in some instances the planned purchase did not materialize.
What happens with Conrail, however, could be important in determining whether or not employee ownership of a company becomes more widespread.
''The Reagan administration has looked on this as real interesting,'' said Fred Hardin, chairman of the Railway Labor Executives' Association, an umbrella group representing the employees of Conrail. Mr. Hardin, in an interview here, said his group, in meetings with top officials of the Reagan administration, has suggested this might be the right approach for other troubled industries.
The theory behind employee ownership is that the employees - if they own the company - have the incentive to make the sacrifices necessary to make a company profitable. At Conrail, the employees have already agreed to wage concessions of about $400 million. If they owned the company, Hardin intimates, they might be willing to do other things as well.
''We would hope to get a turnaround,'' he said, ''and future wage concessions would not be necessary. But if they are necessary, we would have to face them.''
If they don't own the company, the employees are saying, future wage concessions will have to be negotiated anew - possibly for an equity position in the company.
Mr. Hardin, leaning back in a chair at the Dupont Plaza Hotel here, quipped, ''If the Chrysler employees owned the company, maybe they wouldn't be out buying Toyotas.''
Audrey Freedman, an economist with the Conference Board in New York, agrees that in some instances employee ownership looks good. ''Employee ownership,'' she said, ''is very risky, but it may look less risky than the certainty that you will lose your job.''
As for Conrail, she adds that the unions might be able to find some ''inventive ways to run a railroad. It could light a fire under everyone else.''
At another railroad, the Chicago & Northwestern, headquartered in Chicago, employee ownership has been beneficial and the company is now profitable.
But employee ownership has its pitfalls. Robert Zager, a vice-president at the Work In America Institute, in Scarsdale, N.Y., says employee-owned companies have a ''very spotty record.'' In fact, he claims, most such companies are less than successful. Often, he notes, they run into severe financing problems, which are beyond their own resources. He said this happened recently with Rath Packing , an employee-owned meatpacker in Iowa, which has suddenly found itself teetering on the edge of bankruptcy.
Mr. Zager says employees purchasing a company often find themselves inheriting a lot of debt, and old plant and equipment. They also must reassure suppliers and customers that ''business will be conducted as usual.'' And, he points out, ''you can't depend on current business levels, once the company cuts you lose.'' Thus, employee-owned companies often have to continue to slim down, which can be difficult for employees who believe they just purchased the company.
At the Hyatt plant, employee compensation dropped from about $20 an hour, including benefits, to $15 to $16 an hour. Even more significantly, the new employee-owners adopted work-rule changes that increased productivity. These were recommended to them by Arthur D. Little Inc., a Cambridge, Mass., management consulting firm, which made a feasibility study of the acquisition for the employees.
''The employees had to negotiate new job classifications and work rules,'' recalls John Bishop, an Arthur D. Little employee who worked on the Hyatt study. ''They also had to make a commitment to improve the quality of the product as well as their productivity.'' One reason GM was going to close the plant was because it could buy the bearings cheaper from Timken and from Japanese producers.
An employee-owned company must also be able to make independent businesslike decisions if it is to be successful. Thus, management simply can't roll over when the unions make a demand. ''Unions don't know how to run a business,'' Mrs. Freedman said, ''but their employees do.''
Mr. Hardin, says the employees of Conrail would plan to run the railroad purely for profit - as a business. And he says that should the employees buy the company, he knows of at least three other railroads that would be interested in merging with Conrail.
Brian Freeman, the lawyer-financial consultant for the Conrail employee group , quickly adds, however, that Conrail wouldn't contemplate such a merger for five or six years.
Hardin says he is happy with the current management of Conrail, particularly with its chairman, Stanley Crane. If the top management at Conrail were to stay on, one observer says, it could make a big difference. Usually, comments Mr. Zager, only the second or third tier of management stays on, while top management is replaced.
Often when employees become owners, they require special financing from the government, or agreements from the original owners. This was so with Britex Ltd. , in Bridgetown, Nova Scotia. The division, which manufactures stretch elastics, was to be closed two years ago by the parent company, J. P. Stevens Inc., the American textile company. Both the Canadian and provincial government stepped in , however, and provided loans and grants for the purchase of the plant by the employees. Stevens, which also provided some financing, kept a small interest in the company.
Today, Britex is profitable, says Malcolm Inglis, secretary and treasurer. ''We had a turnaround period,'' he commented, noting that the company bought new equipment which has improved productivity. Besides, he added, ''attitudes in general have improved. You care a lot more when part of the company is yours.''
The purchase of the Hyatt plant by the employees also required some innovative financing. GM received some preferred stock for the land and building. The employees then took the deed to the property and mortgaged it for cash with the Prudential Insurance Company. They used this cash to buy the machinery and equipment, which then became collateral for a bank loan to buy the inventory. The inventory then became a receivable which they used to back up a line of credit to pay expenses. Also, GM agreed to buy at least a portion of the output for three years.