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The Unions Are Coming! The Unions Are Coming!

The Unions Are Coming! The Unions Are Coming!

Tue May 12, 2009 8:36pm EDT

Chrysler, GM (GM), and Ford (F) do an OK job of making automobiles, but they do an even better job of reflecting our national neuroses. In the 1980s, the Big Three’s struggle against Japanese imports became a symbol of the decline of American competitiveness. Later, the rise of the SUV became shorthand for America’s moral failure to fight climate change, when that issue still seemed important. In 2007, declining auto sales were seen as the harbinger of a wider recession. (Admittedly, that one came true.)   

Now, as Americans watch the tenets of U.S. capitalism slipping away—Government ownership of banks! Lavish deficit spending! Universal health care!—the Big Three have once more become the screen onto which the national anxiety is projected. Only this time, the specter is chilling indeed: the union-owned company, European-style.

When the government announced a deal last month to give the United Auto Workers a 55 percent share of Chrysler and a 39 percent share of GM, the story became a tale of the doomsday. The UAW and Washington, having ruined the Big Three, "now will take formal ownership of their handiwork," wrote the Wall Street Journal‘s Holman Jenkins. "It’s hard to know whether this outcome is perversity or poetic justice," added his colleague Paul Ingrassia.

It’s easy to understand the pique over the deal. As Peter J. Boyer argued convincingly in The New Yorker, the concessions won by the UAW over the last 70 years played a big role in undermining the auto companies. But the alarmism that met the Chrysler deal—and may surface again if that template is used for GM—is misplaced. The UAW won’t own Chrysler, at least not in any meaningful way. Nor is the union’s new role likely to change the way the company operates, according to experts interviewed by The Big Money.

First, the argument that Chrysler will become "effectively a subsidiary of the UAW" is wrong on two counts, says Harley Shaiken, a UCLA professor and an expert on the U.S. auto industry. The 55 percent stake in Chrysler will be held not by the union but by the union’s Voluntary Employee Benefits Association, a sort of pension trust funded by Chrysler and created to pay the future health care costs of 65,000 UAW retirees and their families. As of this spring, Chrysler owed the VEBA $10.6 billion. But Chrysler didn’t have the money, so it paid half the amount in the only asset it had left: its own stock.

So the UAW’s VEBA owns the stock. But who owns the VEBA? The association is run by an 11-member board, and while the UAW appoints five of those members, all 11 have a fiduciary responsibility to protect the interests of retired workers, not the UAW.

Moreover, even if the VEBA were inclined to use its influence to pressure Chrysler on behalf of the union, it wouldn’t get very far. "There’s no relation between that 55 percent share and governance," says Shaiken. Under the deal proposed by Treasury, the new board of Chrysler will have nine members: three from Fiat; one from the Canadian government, which gave Chrysler $2.4 billion; four appointed by the Treasury Department; and one from the UAW. And that board member will not get voting rights.

Second, whatever one thinks of the institutional safeguards limiting the UAW’s influence on Chrysler’s board, there’s good reason to believe the union’s claim that the arrangement with Chrysler is temporary. The financial cost of the VEBA’s obligations is immense, and as Business Week‘s David Welch noted, "you don’t pay doctors and hospitals with shares." What’s more, because the VEBA owns so much of Chrysler, it will need to stagger the sale of its shares to avoid driving down their value. That will slow down the process; in the meantime, its financial obligations won’t wait, which increases the pressure on the VEBA to start selling as soon as it can.

Third, Chrysler already has experience being run by a board with actual union influence; the union just happened to be German. From 1998 to 2007, Chrysler was owned by Germany’s Daimler. Under a German law called Mitbestimmungsgesetz, any company with more than 2,000 employees must give half the seats on its board to union representatives. IG Metall, the union representing German Daimler workers, even gave the UAW a seat. And unlike Washington’s proposed arrangement with Fiat, the UAW’s seat on the Daimler board had voting rights.

Germany’s experience with giving unions board representation suggests that even when unions have votes on the board—which, again, is not the situation facing the UAW today—the direction of the company is unchanged. Joseph Foudy, a professor at New York University’s Stern School of Business and an expert on unions in Germany, says those unions have rarely been able to translate board representation into influence over the company.

"If a company wants to go ahead with a major initiative, German unions haven’t been able to stop them through board representation," says Foudy. The real power of a union, in Germany as in the United States, remains the ability to strike—a card that the UAW will, if anything, be less likely to play now.

Of course, for Americans deeply opposed to union control, the German example will be little comfort. So imagine the worst-case scenario: Even if the VEBA bowed to pressure from the UAW leadership; even if Chrysler’s (nonvoting) UAW board member managed to exercise superhuman influence; even if the precedent under Daimler somehow doesn’t apply; even if all that were true, would the UAW want to use its new position to change the direction of Chrysler?

At least for now, with Chrysler’s survival at stake, the UAW has little incentive to change the way the company is run. The real question comes later, says Foudy, if there’s a profit. At that point, the UAW may face conflicting pressures when labor contracts are renegotiated, as its members may push to take more of that profit from shareholders—which, under the current situation, include retired workers. But with no profit anytime soon for the company, there’s little to fight over.

Americans have plenty of things to worry about right now. But the prospect of unions taking over their car companies doesn’t seem to be one of them.


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