Enron’s Unfortunate Employee Owners

The breathtakingly swift implosion of Enron leaves many losers in its wake, not least among them those employees who held big chunks of ENE shares in their company retirement accounts. That stock has completely cratered, from a 52-week high of about $84 to less than $1 at the end of trading yesterday. Maybe you saw some of these unfortunates on news broadcasts last night, looking shattered as they explained the vaporization of their retirement dreams. Listening to these awful tales, it’s hard to remember that such a short time ago the conventional wisdom held that employee ownership was a great thing. But then, Enron’s troubles were already playing a key role in building a fresh backlash against that wisdom even before yesterday.

Apparently the 401(k) plans offered by Enron were structured in such a way that participating workers have ended up stuck with unwisely high allocations of the company’s stock. Lawsuits have already been filed. No one would deny that what’s happened to those Enron employees is very bad. But what about employee ownership as a general concept? Is that bad, too?

On Tuesday the Wall Street Journal ran a front-page story headlined, “Corporate Stock-Based Pay, 401(k) Plans Leave Many Employees Holding the Bag.” The emerging Enron debacle was the hook, but the piece made it clear that plenty of companies have indulged in similar 401(k) practices. What’s more, “they’re still doing it,” the Journal said ominously, going on to explain how some workers remain “shackled” to company shares. How can these firms possibly defend such a horrible practice! A spokesman for Gillette, one of the offenders, told the Journal that his company “believes it is important that employee interests be aligned with company interests.”

A couple of years ago that quote would have been used to support the idea that Main Street and Wall Street are on the same team. In the current context, it has exactly the opposite effect: Some big companies are forcing employees to own shares! Employees don’t want shares! Who the hell wants shares?

Well, a few years ago everybody wanted shares. My point is not to pick on the business press because if you consulted any mainstream personal finance publication (including the Journal’s own market section) on this question, you would find someone advising you that putting a big percentage of your nest egg in one stock is a risky proposition. I’m referring to water-cooler and cocktail-party chatter through the late 1990s and into the early part of this decade, when people routinely complained how unfair it was that the bigwigs got stock and the little guy had to settle for boring old cash.

And there was a subsegment of the stock commentariat that pushed the idea that, well, that it’s important that employee interests be aligned with company interests. You want employees to “buy in,” literally, since they’ll no doubt do a better job if there is as little distinction as possible between their firm’s future and their own. If it’s a good idea for managers and executives, it’s a good idea for everybody, right down to the assembly line, or the reception desk, or whatever.

The flaw in this is illustrated by the Enron situation. Whatever went wrong at the company, it was not the fault of the rank-and-file workers, who would have been powerless to fix it in any case. Unfortunately for the rank and file—and the Journal story is very good on this valid point—they play by different rules from executives and top managers. Yes, those honchos may participate in a 401(k) plan whose allocation of company stock might be hard to control. But honchos don’t really rely on such things for their retirement—they rely on big option packages, unrestricted stock grants, bonuses, guaranteed severance deals, plus a host of hedging strategies that mitigate their risks.

At Enron, the now-disgruntled employees ended up with a lot of ENE shares largely because that’s what the company used to match worker contributions to 401(k) plans. (Company stock is also on the menu of options employees could choose from when deciding how to allocate their own investments in that plan.) Enron’s 401(k) rules apparently mean that employees can’t diversify their way out of their company stock until after age 50. Moreover, the lawsuits say Enron instituted a “lock down” period between Oct. 17 and Nov. 19, which happens to coincide with a period when ENE shares were melting down. (They were at about $35 on Oct. 17.) But it seems that the core of these suits—as is usually true in such cases—is the contention that the firm didn’t adequately warn workers of the stock’s riskiness, knew there was trouble on the horizon, and intentionally hid this knowledge. Even if all that’s true, it would be pretty hard to prove.

The arguments for the benefits of employee stock ownership are not less true than they used to be. What’s different is that the downside is no longer abstract. And after all there’s a perfectly legitimate school of thought that holds that if you really want to make big money through the markets, you don’t diversify; you make a concentrated bet. Bill Gates and Michael Dell, for instance, did not build their fortunes on a diversified portfolio. The difference is that a line employee who ties up a huge chunk of his or her retirement fund in the company stock has a lot less influence over the firm’s ultimate fate. This may mean the employee, good or bad, enjoys the fruits of the company’s success or that the employee pays a price for the company’s failure. All of that was just as true when the employee-owner idea was at the height of its popularity. It’s just more apparent now.