In 1989, LTV Steel, then in bankruptcy, sought to divest the eight plants of its bar division, which produced carbon and alloy bar, tool, and remelted specialty steels. There were two serious bidders. One was a financial purchaser who planned to eliminate many of the division's 4,700 jobs. The others were the employees who wanted to keep their jobs.

The November 1989 employee purchase was not consummated without a lot of kicking and screaming. Although it had the backing of United Steelworkers International, the presidents of the four largest of the nine Steelworkers locals involved recommended a vote against the employee buyout. In the end, the rank and file union members voted by a 2 to 1 margin to buy Republic Engineered Steels, Inc. (RESI), even though the average employee gave up about $4,000.

The employees not only bought the company, they also bought its legacy of misgivings and uncertainties, the heritage of labor concessions, LTV’s bankruptcy, attacks on retirees’ benefits, threats of shutdown, as well as the natural concerns regarding the future of Republic Engineered Steels as an employee-owned company in a hostile economic environment.

Could employee ownership transform that legacy?

LTV's union-management relationship had been traditionally adversarial and combative. It has been colorfully described as a "form of civilized, all-out warfare." The new employee owners wanted to change that relationship. To do so they created a new labor-management structure which they dubbed the H-1 Committee (named for a section in the labor contract). Among other things, the committee was responsible for the development of a new management system. This new system included joint problem-solving meetings at all levels of the company, and the establishment of Republic’s Owner Education Program which gave the new employee owners the basic information needed to understand and participate effectively in the operation of the company. The Owner Education Program was a key component of the H-1 Committee’s effort to replace the adversarial environment at Republic with greater cooperation.

The basic philosophy of the new education program was that peers would teach peers. The instructors were not professional trainers from the management hierarchy; rather they were average employee owners trained to teach their co-workers. They were crane operators, clerks, foremen and secretaries. They went through train-the-trainer workshops that were developed and run by the Ohio Employee Ownership Center at Kent State University. The peer instructors wound up spending about 25% of their time teaching; the other 75% of the time, they worked their regular jobs. The classes they taught ranged from understanding common stock and Republic’s financial statements to an overview of the bar steel competition they were up against. The peer trainer approach, as one member of the Committee noted, gave the training "an openness, honesty and credibility that such training done by management, the union, or an outsider, could not have matched."

As useful as it may have been, the Owner Education Program, as well as other activities of the H-1 Committee, were only steps in a long process of change in the traditional relationships. In some locations, the adversarial relationships never did go away. They are still there today. Has it been the result of real and meaningful differences or were personalities the major culprit? That is a question that no doubt will be debated for years to come.

During its first three years -- the "survival stage" as former CEO Russ Maier called it -- Republic faced enormous challenges as a stand-alone operation, including a fiercely competitive market, stagnation in the auto industry and a near depression in the steel industry. Yet RESI weathered the storm.

In 1994, Republic tapped the public debt market to put in a new $165 million "cast-roll" facility at its 8th Street plant in Canton. The Cast-Roll technology links five separate steps in steel-making into a single process which converts molten steel into billets. In layman’s language, what used to take days or weeks now took hours.

The introduction of the Cast-Roll facility allowed the union and the management to implement a new work system dramatically changing conventional steel industry work practices. This new work system was built around team concepts, flexibility, multi-task training and pay for skills. The new concepts were anchored in the 1993 labor agreement. The company put the Cast-Roll employees through an average of 17 weeks of training to run the new equipment, all of which, it was expected, would produce lower costs and higher quality products while creating much more satisfying working conditions for the employees. Governor George Voinovich termed the new work system at the Cast-Roll facility "the wave of the future."

This state-of-the-art technology did cut costs dramatically when it came on stream in October 1995, but price weakness in the steel market cost Republic most of the gains and kept Republic from becoming a financial success.

Many employees trace the decline in management and union cooperation to Republic's going public in 1995. The public offering of eight million shares left the employees with about 54 percent ownership of the company but raised only about 60% of what had been originally discussed, so the public issue did little more than cover the costs of buying out the employees' preferred shares. It brought in little for capital improvements.

It did, however, divide management's attention between serving two different constituencies: the minority public shareholders and the majority employee shareholders. In the view of some employees, management opted to represent the interests of minority, outside shareholders.

While Republic Engineered Steels did a lot of the right things, the company posted net losses throughout the 1990s. This is never a good situation in an industry that requires major investments just to stay competitive. Yet despite this unimpressive financial performance, in July 1998, the company announced an acquisition offer that would buy out its stockholders, assume its considerable debt, lead to nearly $200 million in new investment in Stark County, Ohio, and fund a favorable labor agreement with the United Steelworkers.

In a deal valued at about $420 million ($145 million in cash plus the assumption of $275 million in debt), the Blackstone Group and Veritas Capital Partners joined forces to buy the struggling company. Blackstone and Veritas already owned several small bar steel operations, including Bar Technologies, the remnant of Bethlehem Steel's wire and rod operation. The combined company, named Republic Techno-logies International, is expected to have annual sales of about $1.2 billion, employ nearly 5,000 employees (including 3,000 in Stark County), and have the capacity to produce about 20 percent of the bar steel consumed in the U.S. The Blackstone/Veritas buyout was prompted by RESI’s early 1998 decision to build a new hot rolling mill. That led to fighting between the Union and Republic management over the location of the proposed new plant. The Union wanted it in Stark County, concerned that building it elsewhere could lead to layoffs at the existing facilities. Management was unwilling to commit to building it there. The International Union, regarding RESI management as unresponsive to the needs of its workers, then began discussions with representatives of Blackstone to put together a deal.

The Blackstone Group, founded in 1985, is headed by Peter G. Peterson, who served as Secretary of Commerce during the Nixon Administration. Veritas is a private investment fund founded by Robert McKeon in 1992. The two groups have been partners in BarTech since April 1996. David Stockman, former Reagan Administration official, who is Blackstone's Senior Managing Director, has said "our plan is to combine the best operations of both companies, invest substantial capital in new mills and upgraded facilities and implement a constructive new relationship with the Steelworkers union." Some may find irony in this--Steelworkers and Republicans aren't usually even mentioned in the same breath.

Among the many approvals needed to clear the way for the acquisition was a new labor agreement. On August 31, the USWA International announced that the membership had overwhelmingly ratified a new labor agreement that covered some 3,200 USWA members at RESI and about 800 members at the three companies already owned by Blackstone: Bar Technologies, in Johnstown, PA and Lackawanna, NY; Bliss & Laughlin in Harvey, IL; and Canadian Drawn Steel in Hamilton, Ontario. The new five-year contract provided wage increases and improvements in employment security, insurance and pension programs, including a 40-hour per week earnings guarantee.

The contract also called for investments of about $400 million in plants operated by Republic and BarTech over the next five years. Besides routine upgrades, Stark County will gain about $120 million for a new hot-rolled bar mill, $40 million for a new cold-finished mill, and $35 million for melt shop improvements.

With the stock offer, pension improvements and other incentives, the union’s ranks in the combined company will probably be thinned significantly over the next five years. Most of the downsizing is expected to come from the plants in Stark County. David R. McCall, head of the negotiating team for the USWA, has said the deal contains the incentives necessary for the combined company to get the downsizing it says it needs in a humane fashion. Under the agreement, for example, pensions were almost doubled from $1,000 to $1,925 per month for employees with 35 years of service.

In exchange for the union contract improvements and incentives, the new company will gain the efficiencies of a smaller work force operating with modern work practices that allow each worker to perform multiple jobs. McCall said, "the investments, as well as new work rules, will make the new company a world-class operation." The new agreement offers a flexibility in workforce utilization that it did not have before, eliminates a lot of what were considered restrictive work practices and modifies the application of seniority to allow the company to place the best qualified person on a job.

Lest anyone wonder, the union contract was not the only deal negotiated in connection with the new venture. Republic’s Board of Director’s had previously approved "golden parachutes" that provided at least $3.8 million for the company’s top six executives if they lost their jobs.

There can be little doubt that RESI would never have survived into the 1990s had the company not been bought by the employees. But the euphoria didn’t last. The company lost money in most years of its existence as an ESOP. Did it have to be bought out to be competitive?

Given the lack of true labor-management cooperation, the answer is probably "yes." Although RESI had a lot of good things going for it, it never seemed to take full advantage of its employee-ownership structure. It did not fully grasp the reality that an ESOP needs trust and cooperation, with everyone going in the same direction , if it is to become truly successful.

Language in the collective bargaining agreement provided all the tools for a model labor-management cooperation situation, but both labor and management seem to agree that it never really worked like it was supposed to. As in most similar situations, there is probably enough "blame" to go around.

The USWA-Blackstone/Veritas agreement addresses two key problems that held RESI back: excessive headcount resulting in inefficiencies in operations and restrictive work rules. RESI had sought, ultimately unsuccessfully, to deal with both.

Could these items have been addressed successfully by RESI as an ESOP company? Probably, had the parties had more trust in one another. However, RESI, as indicated by financial losses year after year, couldn’t afford the "pension buyouts" and the "40 hour guarantee" that Blackstone agreed to as part of the deal with the Steelworkers. It would have been necessary to accomplish them in some other fashion. However, the level of distrust that led management to go to court to vacate an arbitrator’s decision, and led some in the union leadership to resist all efforts to move the company forward, continued to color the collective bargaining relationship and prevented the implementation of model labor-management cooperation contract language.

Whatever the shortcomings of RESI as an ESOP, overall the experiment must be considered a success.

Employees did well financially. The average of $4,000 per hourly employee by LTV was rolled over into a preferred shares ESOP plan which was cashed out for about $20,000 in 1995. The average employee, who participated in the 1989 buyout, netted an additional $21,000 from the sale of the ESOP common stock to the Blackstone Group. That totals $41,000 -- or roughly $5,000 per year per employee for 8 years on a $4,000 original investment.

More importantly, employee ownership saved the company and the jobs. Even though it was generally unprofitable, RESI modernized its facilities and made itself attractive enough to bring Blackstone and Veritas into the mix and, with that, brought additional investment and the continued anchoring of jobs in Ohio. And, after all, saving the company and the jobs was what the employees set out to do in the first place.

While the employee owners of Republic Engineered Steels were in the process of selling their company, the 370 members of Steelworkers Local 2345 at Republic Storage Systems staged a 16-day strike against theirs. This was the first strike at Republic Storage since it became an ESOP in 1986. In fact, it was the first strike since the late 1950s.

Republic Storage Systems, a leader in the design and manufacture of high quality storage products including school lockers, file cabinets and shelving, was bought by the employees in 1986 from LTV steel. With the Union taking the lead, the employees banded together to buy 100% of the company for about $25 million. To help raise the money, employees, both union and salaried, agreed to take a 15 percent cut in wages and benefits.

On the surface, Republic Storage Systems appears to be a great example of a participatory ESOP. They had excellent labor-management cooperation language in their contract. The Union had two seats on the company’s Board of Directors, elected by the Union members--two other seats belonged to non-union employees and the remaining three seats were held by outside directors elected by the inside directors. They were owners of the company.

Why go on strike against yourselves?

Part of the reason was economics. Going into the 1998 negotiations, the hourly employees were earning $2.60/hour less than the industry average and 40 cents/hour less than they earned in 1986 when the company became an ESOP. The pension plan also lagged the industry. Furthermore, the company was now making money, something it hadn’t done in the first 9-10 years of its existence as an ESOP. Union workers wanted their share.

But the reason may go deeper than simple economics. There seems to have been a lack of trust in top management and a sense of unfairness that was generated when in 1995, after the negotiations with the Union, a group of top managers received big increases. While there is nothing inherently wrong in giving managers raises, there apparently was no explanation nor justification given to the employee owners, only indignation that the word leaked out.

The relationship of trust took another tumble in late 1997 when the employee owners were asked to consider a bid for their company without any explanation as to who the anonymous bidder was or what their intentions were. The workers felt they were being asked to buy a "pig in a poke." The employee owners voted it down, expressing concern that the mystery bidder might close the plant and move the work elsewhere.

When the smoke cleared after the 16 day strike, the parties had reached an agreement that provided $2 an hour over the three year contract, a one percent increase in the pension multiplier, and improvements in sickness and accident insurance and vision care benefits.

Today both union and management downplay the strike. They agree that the best thing is to make Republic Storage a better company as it moves into the 21st century. Robert Easton, Human Resources Director for Republic Storage, says that despite the strike, the parties can have a good relationship and they now need to set goals and move forward working together to increase the business for the good of all. Pat Bentley, President of USWA Local 2345 concludes that "we all need to put this behind us, to get rid of the baggage we’ve accumulated over the years and go forward collectively to develop a more participatory structure that would involve employees more than they have been."

Employee ownership is not necessarily a bed of roses for labor. At both Republic Engineered Steels and Republic Storage Systems, employees owned a majority of the company. In both cases, employees generally felt that management was not responsive. In both cases, employees could not make their voices heard effectively through corporate governance channels, despite board representation, or even through the additional contractual participation mechanisms. Their experience raises at least three major issues.

First, what ought the relationship between management and labor in employee-owned companies be?

Employee-owned companies aren't run by the employees. They hire managers. The managers are supposed to run the company for the shareholders, but the shareholders are the same folks who they are managing. This makes for a complex relationship.

That's particularly true when there are outside shareholders as well as employee owners. At Republic Engineered, management itself was divided over the degree to which it needed to respond to outside shareholders versus employee shareholders. The management split led ultimately to the resignation in January 1997 of several managers who argued for the latter. Over the next months, the remaining managers found themselves increasingly at loggerheads with the union.

Second, what do shareholders want managers to achieve in ESOP companies? The simple answer "maximize share value," which we assume drives managers in publicly traded companies for their absentee owners, generally doesn't hold for employee owners. Employee owners want to balance raising share values (a long term benefit) with reinvestment for job security (another long term benefit) and with current income and benefits. Thus while it is possible to persuade employees that new technology has to be introduced and jobs cut to remain competitive, employees certainly expect the new jobs coming on stream to be located within commuting distance of the jobs being lost.

Third, how to recruit managers? The employees and Union had helped hire the CEO at Republic Storage. Like other ESOP companies, they used the same pool to recruit managers as conventionally owned firms. Had Republic been outside owned, shareholders would have praised the CEO. Instead, they went on strike against him. We need an ESOP management-recruitment firm that understands the needs of employee-owned companies.