Holmes Report Blog

The Holmes Report blog focuses on news and issues of interest to public relations professionals. Our main site can be found at www.holmesreport.com.

Monday, January 30, 2006

The Unacceptable Face of Modern Capitalism: Ben Stein is a classic Ayn Rand/Milton Friedman free market economist, a veteran of the Nixon White House and still a Nixon loyalist (as well as an occasional actor and game show host). So when he finds a corporation’s behavior unacceptable, it’s worth paying attention.

Writing in the business section of Sunday’s New York Times, Stein excoriates management at United Airlines and describes the company’s history as “a perfect text for the ethical morass in which American business often finds itself.”

In the early 1990’s, when some investment bankers were casting around for a way to make tens of millions of dollars, they came up with a doozy: the employees of UAL would give up some of their salaries and benefits in exchange for stock in UAL, eventually becoming UAL’s largest owner through an employee stock ownership plan.

The deal went through — with staggering compensation to Wall Street — and in 1994 the American employees of UAL, as a group, became its largest owners….

Trouble was not far behind. The employees found management demanding pay cuts, big (and, for passengers, inconvenient) changes and cuts in scheduling and services.... Then came the blows of 9/11 and a recession, and then rising fuel costs. There were demands for more cuts in pay and benefits and more layoffs. That was not enough. About three years ago, UAL was “forced” to enter bankruptcy to stay alive.

This step meant that UAL could drastically cut workers’ pay—and it did. Pensions were simply jettisoned…. Thus, in a series of evil events, management of UAL basically ruined the lives of the employee-owners, if that is not putting too fine a point on it, by taking away their savings, incomes and pensions….

Now UAL has been reorganized. It is preparing to emerge from bankruptcy. It will soon have a stock offering. This offering is expected to raise very roughly $6 billion…. Here comes the good
part: management has asked the bankruptcy court to let it have—free—roughly 15 percent of the stock in the new company, or about $900 million. [Glenn] Tilton, the chief executive… would get about $90 million personally for his hard work shepherding UAL through bankruptcy (for which he was already paid multiple millions of dollars).

The bankruptcy court, instead of ordering Mr. Tilton’s arrest, instead cut the management share to about 8 percent, so he will get more than $40 million….

So here it is in a nutshell: employees are goaded into investing a big chunk of their wages and benefits in UAL stock. They lose that. Then they lose big parts of their pay and pensions. They become peons of UAL. Management gets $480 million, more or less. “Creative destruction?” Or looting?
It’s sharp analysis. The only thing Stein doesn’t offer is a solution.

But it put me in mind of a book I read almost 20 years ago, and which I still consider to be one of the best "public relations" books (though I don't think the words PR ever appear in it) I have ever read. In Corporate Culture and Performance, John Kotter argues that companies that focus on three core stakeholder groups--employees, customers, and investors--will outperform those with a focus on a single stakeholder (almost invariably the shareholder).

Along the way, he also identifies a breed of company that focuses on none of its stakeholders, that is interested solely in enriching its own management. The United Airlines of today falls neatly into that category, and may be rewarded for it in the short-term. One can only hope that in the long-term Tilton and his team reap what they have sown.

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