UAW might take an equity stake in General Motors

A report today on the Wall Street Journal website http://www.wsj.com/ suggests that the United Auto Workers Union is considering taking an equity stake in GM in exchange for "concessions". The proposed concessions are a deferral of the required payments into the VEBA Health Care Trust and suspension - but not abolition - of the Jobs Bank where laid off employees are paid nearly their full wages to sit around, play cards, and "be available" for work if needed.

These concessions are totally inadequate. What is needed is a complete abrogation of the productivity destroying work rules contained in the current UAW contract. That layoffs will be the result is inevitable and unfortunate. That work rule reform is vital to the long term existence of the company is the 800 lb gorilla in the room that few are willing to discuss.

If work rules are flexible, pay rates for blue collar workers can be really quite high. If work rules are inflexible - turning every management decision into a negotiation - minimum wage may be more than the business can afford. The problem is not the amount of money that the workers get for working: it's the amount that they get for not working.

The last major buyout of a large and financially desperate company took place in 1994. Then, the Air Line Pilots Association (ALPA) and the International Association of Machinists (IAM) took a 55% equity stake in United Airlines on behalf of their members. They also gained three seats on the twelve member Board and right of veto over the appointment of the Chairman and CEO.

Sometime employee ownership works, but often it is a disaster for all concerned. In the case of the United deal, the unions found themselves with a conflict of interest between their duty to represent their members and their fiduciary duty to all of the shareholders - including the Employee Stock Ownership Plan (ESOP) through which the employee shares were held.

Needless to say, ALPA and the IAM resolved the conflicts, over both wages and work rules, in favor of the short term wishes of their members. Management incompetence, union intransigence, and the dysfunctional economics of the airline business drove the once proud airline to the edge of bankruptcy. The aftermath of the attacks on September 11, 2001, which strained even relatively healthy airlines, just pushed United over the edge. A Chapter 11 filing took place in 2002.

The UAW's officers are elected by its members - and these officers are very well paid. That being so, the UAW will resolve its conflict of interest in favor of the short term interests of its members rather than the company's financial health. The result will be that the inevitable is deferred, but only for a short while, and taxpayers suffer much for little gain.

GM must be restructured: Chapter 11, with a tough Bankruptcy Judge to knock heads together, is the place do it. Sooner, rather than later, is better.