ESOP Fables

THE small but growing trend toward worker-owned companies in the US has gained momentum from the planned takeover of United Airlines by an employee/management group led by the airline's pilots. The $6.75 billion buyout would be the biggest such employee venture so far. Worth noting, this is one of the first mega-takeovers to be funded without any junk bonds. As such, it may signal the end of an era in American business. Junk bonds - high-yield, high-risk securities - have largely fueled the recent binge of hostile takeovers and leveraged buyouts that have restructured corporate America.

But the junk-bond market has softened, both because yields have declined relative to other investments, and because the growing rate of defaults has made investors skittish. In the future, junk bonds likely won't be such a ready source of bottomless war chests for corporate buccaneers. Meanwhile, the junk-bond era has left in its wake hundreds of businesses groaning under high-interest debt - businesses that, in the event of a recession, could become corporate junkyards.

The United buyout group found another source of creative financing, though, in the company's employee stock ownership plan (ESOP). Such plans, around since 1974, have mainly been used by small companies to spread ownership among workers, both to benefit employees and to provide an incentive to productivity. To encourage ESOPs, Congress granted tax breaks to the companies and to banks that lend ESOPs money to buy stock.

In recent years, however, many corporate giants have created ESOPs, often for reasons little related to Congress's intent. The tax breaks give companies access to cheap - because taxpayer-subsidized - funds (the United case), often without giving workers a meaningful voice in corporate affairs (not the United case). Companies also have used ESOPs to defend against takeovers, by placing key blocks of stock in friendly hands.

The House Ways and Means Committee has approved a measure that would eliminate some of the ESOP tax breaks to cut back on what some members regard as abuses of the device. Used properly, ESOPs are a worthwhile tool to give workers a greater stake - and greater say - in their companies and spur competitiveness. (This may, in fact, be one of the consequences of the United deal). But taxpayers shouldn't pick up part of the tab for takeovers or defending against takeovers. The measure deserves careful consideration on Capitol Hill.