Chrysler, GM and union ownership

Posted by: David Welch on May 01, 2009

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Now that the United Auto Workers will likely own big stakes of General Motors and Chrysler (possibly 39% of GM and 55% of the latter) some very thorny questions arise. How will management work with some degree of union ownership? First, let’s look at a few facts. The UAW won’t directly own equity stakes in the car companies. The shares will be owned by a Voluntary Employee Benefits Trust, or VEBA, which invests cash and manages a portfolio to pay union healthcare benefits. When all of the legal proceedings are done, which should be next year, the VEBA trusts will have a board of trustees who could get representation on the boards of the companies.

Does that mean GM CEO Fritz Henderson would be working, in part, for the union? Partly. He may have to answer questions at board meetings from VEBA trustees or their appointed representatives. But this isn’t going to be like an employee-owned company when the workers actually pick management.

Things could get touchy during union negotiations, however. Henderson and whoever Fiat picks to run Chrysler will have to cut a deal with labor and then make sure the board is comfortable with it. If the VEBA trust has union-friendly people on its board, that could make labor negotiations uncomfortable for management.

But believe it or not, there will be checks and balances. The union trustees could pressure management to play nice and give labor fat contracts. But if that results in a less competitive car company, then GM or Chrysler would lose money and their shares will lose value. Then, the trust will have a tougher time paying those health benefits. And remember one this: Trustees have a fiduciary duty to the trust. They may like the UAW. They may also support the cause of blue-collar affluence. Heck, they could be fire-breathing socialists who loathe management. But their legal duty is to manage that trust and make sure it can make a return on its investments and pay the benefits that the union negotiated years ago.

The UAW’s VEBA could do a couple big things to make sure there aren’t conflicts of interest. First, they appoint trustees who are smart business people and know how to manage an investment. These should be the kind of minds who know that GM and Chrysler need low costs to survive and thrive. Second, in order to get cash into their funds, they will need to sell down their stake in both companies. They will need to do this at some point because you don’t pay doctors and hospitals with shares of GM.

There are plenty of critics who hate the idea of the union and government owning pieces of the carmakers. But in a way, VEBA ownership of shares in GM and Chrysler could force labor to realize—right down to the nitty gritty of their own medical benefits—how important it is for these two companies to make real money. If they don’t it would be their own members who lose healthcare benefits. And to the UAW, great healthcare is the last thing that its leaders have ever wanted to touch when it came time for a new four-year labor deal.

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Reader Comments

Matt H.

May 1, 2009 05:54 PM

"But in a way, VEBA ownership of shares in GM and Chrysler could force labor to realize... how important it is for these two companies to make real money."

So after a solid year of the feds handing out billions to companies that are "too big to fail", suddenly VEBA is going to develop market discipline? Please. The only thing they're going to develop, or rather refine, is their taste for politicians who can continuously raid the treasury on their behalf.

Peter

May 1, 2009 06:28 PM

Why isn't the taxpayer one of the owners? After all, didn't we pour millions of tax payer's money down the drain and still it went bankrupt? Instead of draining away so much money we should have let it go into bankrupt from the beginning like it was supposed to happens. This is what happens when there is government intrusion. Wrong move.

mikel

May 1, 2009 06:38 PM

Good job David. It looks like you pretty much got the info right.

RANDY

May 1, 2009 06:43 PM

Its jus ridiculous we have to bail out these companies!!! it is called tireny when we have to pay our money for corporate gread!

Paul (Vw)

May 1, 2009 07:29 PM

>>>> "There are plenty of critics who hate the idea of the union and government owning pieces of the carmakers. But in a way, VEBA ownership of shares in GM and Chrysler could force labor to realize—right down to the nitty gritty of their own medical benefits—how important it is for these two companies to make real money. If they don’t it would be their own members who lose healthcare benefits. And to the UAW, great healthcare is the last thing that its leaders have ever wanted to touch when it came time for a new four-year labor deal."

Hate? Maybe disagree is a better word, but I'll leave that to the pundits and wordsmiths.

About the only thing that makes me feel the warm fuzzies in this posting is the cute logo plastered at the top.

I think it's universally accepted that the UAW contributed to the implosion of the Detroit3. Had Detroit not imploded, perhaps the UAW members would not have had to give up so much...as some in the press claim they recently have. If we accept the premise that the UAW workers have recently sacrificed ever so much, then we have to ask the following question:

If the UAW knowingly contributed substantially to the loss of pay, benefits, and jobs as they face now...then what gives us hope that they will suddenly start acting in a way consistent with mutual success of the corporation and themselves?

In many ways the union demands helped push Detroit off the cliff, and not in an unsubstantial way. After decades of this behaviour, have they finally learned their lesson? Or have they learned instead that political patronage has its benefits, and if UAW Motors falters Mr. Obama will send more helicopters of money?

Tim

May 1, 2009 07:54 PM

Interesting take. Of course, the one big unstated assumption that you made is that the UAW isn't going to call the government's bluff. If the UAW looks at basically any other industry the government has been heavily involved in, going bust is not something that is usually allowed to happen. The UAW has strong political ties and lobbyists. Do you think their political machine is going to lay down and let them have to make the tough decisions if it can help it? I suspect that the industry will remain subsidized until there is substantial public outcry against it, which may or may not happen. As an example, Amtrak has never made any substantial headway toward independence. We have set a precedence that we will prevent true failure at all costs. Once you have the taste of guaranteed Welfare, I am afraid there is no going back.

Corn Julio

May 1, 2009 08:42 PM

This is a disaster waiting to happen. Who would invest in any company where the gov't or a union own any equity?

DanDi

May 1, 2009 08:42 PM

Will I, the 55 year old American taxpayer, ever see a return on the BILLIONS I was required to invest in these car companies that could not compete because of poor management?

sonnyturner

May 1, 2009 08:55 PM

now that you actually own part of the companies,start acting like stock holders .
if the companies make more money your stock will be worth a lot more on the market. also yo could purchase more stock and gradually own a controlling interest
in either or both companies. by taking shares as part of your pay,you could give yourselves and the company an edge up on the other companies. more sales means more jobs and more retirement pay when you need it.

James Raider

May 1, 2009 09:03 PM

WHITE HOUSE INTERFERENCE

Chrysler and its “rogue” debt holders shouldn’t give in to the Administration’s bully pulpit.

http://pacificgatepost.blogspot.com/2009/05/dilettantes-at-chrysler-gate.html

ps

May 1, 2009 10:31 PM

If this does not have the potential oft giving a hand grenade to a monkey I don't know what does. Get some pro's, NON MBA type who know the ropes. Run the UAW as a business concern as opposed to a Socialist Utopia (start cutting the 80% pay for playing cards in a union hall). Get realist veterans on board. Dump the idiot Geffliger hanger onner whatever his name is. Get street wise folks in the drivers seat. Then you get a way forward.

Mike Reardon

May 2, 2009 12:07 AM

For Chrysler and even more with GM it comes to transfer of their past massive debt obligations for direct ownership by the debtors. Union or long-term debtor, they will be looking next for debtor in position financing to make the company work on a company that is not going to gaining great returns. They may find themselves working for those banks that offer operating cash, you can bet they will pay big bucks for that short term debt to continue in business.

Matt Lechner

May 3, 2009 02:51 PM

The labor interests should consider the potential long-term effects of linking arms too strongly with the extreme left-wing elements of the Obama administration, who are seeking to discredit lending itself in a nod to the principles of Islamic finance. This issue is coming up with disturbing frequency, and the re-enactment of 9/11 at the 11th hour of Obama/Wall Street negotiations regarding Chrysler, using the Presidential jet outside the headquarters office windows of one of the main Chrysler creditor "holdouts", Oppenheimer Funds - did not go unnoticed. That was a new low in American history, the use of USAF1 to terrorize the American people, and it is really appalling. As extremist Arabic/Islamic interests have gained very significant financial power in the world, and in Washington, we have seen them again and again trying to discredit the Western financial system, in particular anything involving the payment or receipt of interest - and while we have issued statement upon statement urging the parties to the Chrysler dispute, including the Federal Government, to put a rescue in place - we applaud Oppenheimer for standing up to the Obama administration in effect force feeding a restructuring essentially based on Islamic finance principles to the creditors. Those same forces are likely behind the extremely ill advised "zero-percent" crowd at the Federal Reserve who are going out on a limb in their bizarre experiment to discredit the bond markets by eliminating interest. In plain fact, bonds are an excellent mechanism of finance, and allowing one particular religion, albeit a very wealthy one, to have undue influence - that is improper and financially ill-advised. We also note that Citibank has essentially been wrecked during the latest phase of its corporate life, during which it was essentially controlled by Islamic interests. A coincidence perhaps. America does welcome all religions, including Islam, however - if extremist elements keep pushing to discredit any forms of interest-related finance, that is not likely to end well - whether or not the Presidential jet is used to re-terrorize Lower Manhattan. Again, we would urge the labor interests to take stock of the reality of the situation, which is if you make a mockery of Western finance, and abuse Wall Street because you yourselves are in a long-term distress situation - you may be burning bridges that the Obama people may be able to afford to burn, but not you. Remember, if you abuse the financial system to gain managerial and ideological control over Chrysler, you are abusing the United States of America. And that is not acceptable.

Matt Lechner - CFP, CRPS, FRM
Chairman - WSSIG, the Wall Street Special Interest Group

David Richeson

May 3, 2009 05:24 PM

The UAW owning a significant portion of these automakers should be a very positive thing for the UAW and for the management teams. For decades now these organizations have been trying to figure out how to work together. Significant union ownership should help to put everyone on the same page.

It is critical for everyone to remember that neither management or the unions are solely responsible for creating the problems at the automakers. Most of the country was quite happy in the fifties, sixties and seventies to receive some of the benefits derived from the contracts negotiated between the automakers and the UAW. Most American families benefited with a higher standard of living as a result. At the same time shareholders benefited with terrific returns on their investments.

This is an opportunity to really work together so that both sides maximize the outcome for everyone's best interest. At Toyota the kaizen programs are supported by the employees and the management of the company. That has helped to make Toyota the envy of the auto industry. The union and management must work together for these companies to succeed

acrim

May 4, 2009 02:38 PM

The UAW helped drive these companies into the ground and now were giving them ownership after the tax payers bail them out. Its really incredible. And for King Obama to chastize ordinary bond holds who kept these companies in business so these UAW morons could get paid these past years, is a shame.

Charles Wright

May 10, 2009 12:45 AM

David you are way of base with your comments. A lot of people that once supported this company will not buy another car from them knowing their money will go to the unions.
Toyota is the envy of the industry because employees and managment work together without unions. So indirectly you proved what many are saying here.

Martin (UAW)

May 12, 2009 12:55 PM

Union bashing. Wow, surprise ,surprise, surprise. Did my Union crush the Det3 so much money they are pushed into bankruptcy? No, poor business decisions did, free trade policies (with grossly unbalanced trade) did, consumers who bought items from those free trade countries did, and the Det3 moving their plants to counties to Mexico did. The plants in mexico are damn near ran like a Nazi concentration camp. The workers are bussed in (because most of them cannot afford to buy a car), worked for 10-12 hours a day, and concern for safety and envirionment are the least of their concerns.
You can dislike labor unions all you want , but please realize that most of the labor laws in place came from union brothers and sisters of all unions (UAW, Teamsters, ILA, IBEW, Etc.). Is your 13 son or daughter working around dangerous materials or in dangerous situations? You're welcome. If you work 40+ hours a week are you paid overtime? You're welcome. Did a small portion of my tax dollars get paid to bail out companies and banks. Yes.

As far as Toyota being union free, not entirely accurate. The Toyota Corolla is made in Canada and the US. Check the VIN, if it has a US VIN it was made by UAW brothers and sisters.

john

May 20, 2009 11:28 AM

Comrades, i'm working real hard on my Marxism down here in Texas. I've got alot of teachers on the Coasts and the Rust Belt. Thanks. Somehow, i don't get how a 12 grade graduate can out think a PHD in terms of actually designing/marketing/managing these cars. UAW will over ride mgmt ya know. And, lastly, how did a non-American, community organizer with Acorn get soooooo much power? Good luck America! John, the dummy in Texas.

Paul

May 21, 2009 11:38 AM

It seems that some people want to think that the UAW has much to blame for the demise of the Det3 than the DET 3 themselves. I am a UAW worker living in Texas, and to be honest, I am grateful for all the union has done for me and my family. One thing that's being omitted is that the members of the UAW have attempted to inform GM that something was amiss in the 1990s and that Toyota, Honda and Nissan were about to overtake us. Ideas were submitted to corporate brass in Detroit as to what was coming and how we could respond. GM's response; "We have it all under control." Seems disheartening that this company never listens to its workers when we offer advice on new products and what the people want. Now, we are here in 2009 awaiting word on if I will get a massive cut in pay just to keep working. As June 1st approaches, I wonder if GM will NOW listen to us, or will they continue to not care and just put us UAW folks on the streets, PERMANATELY!

victor fanjul

August 19, 2009 10:30 AM

I believe, that for the first time, the UAW will help GM & Chrysler. Now, they can not keep doing what they beign doing in the past. Take the money and run! No more of "me"me, etc. now it's our life, or else. Do you understand UAW.

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Want the straight scoop on the auto industry? Detroit bureau chief David Welch , Dexter Roberts and Ian Rowley bring daily scoop, keen observations and provocative perspective on the auto business from around the globe. Read their take on such weighty issues as Detroit’s attempt at a comeback, Toyota’s quest for dominance and the search for an efficient car.

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