Five years ago, young machinist Randy Reynolds helped organize an important experiment here in industrial democracy.

He convinced 350 unionized workers to trade in their pension rights for ownership of South Bend Lathe Inc., which then became one of the rare 100 percent employe-owned companies in the United States.

Now a disillusioned Reynolds is a leader in another development -- the first strike in which owners are picketing themselves.

"We know this looks stupid, but we are not stupid," Reynolds said, talking about the strike that has shut down SBL for the past five weeks.

"We are unhappy with the way the employe stock ownership plan [ESOP] has worked at the plant," he said.

The strike's primary cause was economic -- management owners wanted to take a cost-of-living allowance from worker owners. But both sides agree that the underlying issue is control -- whether production and other important decisions will be made in a more democratic manner, as has been suggested by ESOP proponents, or whether those decisions will continue to be made in the old way -- management orders and labor follows with little or no questioning or involvement in the decision-making process.

"What we've had here for the last five years is ownership without control," Reynolds said, standing in front of a tiny "strike headquarters" trailer a few yards down the road from the SBL plant.

"We've bent over backward since 1975 to make a good product and keep it selling . . . . We've kept our mouths shut -- covered up our differences with management to avoid bad publicity . . . .

"But all we got was the same treatment we had before the ESOP, maybe even worse. We make no decisions.

We have no voice. We're owners in name only," Reynolds said.

"Employe ownership does not mean employe management," said J. R. Boulis, 57, president of the company and chairman of the board. "Somebody has to give the orders to make things happen. You can't run a business by committee," he said.

The problem at South Bend Lathe, a machine tool manufacturer, is a classic example of why ESOP programs have had rough sailing in other parts of the country:

The economics of the plans frequently are troublesome. Rarely do owners want to sell workers thriving firms -- especially larger units like SBL that employ 500 or more people. Accordingly, as in the case of SBL, ESOPs often have been used to save dying companies.

ESOPs are not panaceas for traditional labor-management problems, especially as long as both sides cling to their pre-ESOP identities.

Organized labor, more comfortable with traditional wage-benefits-hours bargaining, is largely reluctant to explore the alternative forms of compensation offered by ESOP programs, about 4,000 of which exist nationally.

Most of those ESOPs fewer than 500 workers. Few are 100 percent employe owned. Even fewer still allow their employe-owners to vote stock, as does SBL.

There are also problems of perception and expectation.

Reynolds is an example. He was 24 on June 27, 1975, when he took over a meeting of SBL's then 350 unionized workers. In a forceful speech, recorded on film, he persuaded the workers to give up their pension rights to help save the company.

The pension forfeiture was a kind of "negative collateral" needed to persuade federal and private sources to loan $10 million to SBL, then a financially moribund division of Amsted Industries Inc. of Chicago.

Amsted, at the time, was about to unload the division on a liquidator -- an action that would have wiped away SBL and its 500 jobs.

But with the $10 million in federal and private money, the managers and workers were able to buy the division from the parent firm.

SBL managers hailed Reynolds as a hero for his role in helping to save the company. "They even offered him a job in the office," according to one source who is intimately familiar with SBL's history over the past 10 years.

But today, SBL's President Boulis calls Reynolds a "radical" who is a "leader of a bunch of rabble-rousers" threatening the company's existance.

"I did what I did back then just to save our job," Reynolds said. "I didn't know a damned thing about ESOP, other than that it would keep the plant going and the paychecks coming. I figured that we could wait until later to work out the kinks in this ownership stuff," he said.

Like Reynolds, other SBL strikers who wre interviewed denied that they expected the ESOP to make them rich. None said he (nearly all are men) wanted to manage the firm, per se. But they all said they expected ownership to confer on them a kind of collegial equality with management in which their opinions would be listened to, their views sought.

"That's the kink that was never worked out," Reynolds said, blaming Boulis.

Under Amsted, Boulis was division president of SBL. With what he now calls "great frustration," he watched the division lose $427,000 in 1970, $977,000 in 1971, $479,000 in 1972, $302,000 in 1973, $514,000 in 1974, and finally $3.68 million (which includes Amsted's losses on the sale of SBL) in 1975.

Boulis came to SBL in November 1969, the last year the division showed a modest profit before it began bleeding red ink in 1970. An admittedly proud man, he argued then that the losses were not his fault -- that they were caused by a recessionary economy that hit the machine tool industry particularly hard, and that they occurred partly because, "The people at Amsted wouldn't give me the right to manage."

Amsted officials, reached in Chicago, said they gave Boulis the same chances given to all of the corporation's division chiefs.

Nowadays, Boulis admits to visitors that he was out to prove to Amsted and himself that he could make SBL a profitable firm. That is why he pushed so hard in 1975 to save the company from the liquidators. That is why, in desperation, he turned to an acquaintance at First Bank & Trust here to join him in persuading the federal government to establish an ESOP at SBL.

It was a fortuitous circumstance in which the government itself, through its Economic Development Agency, was looking for an opportunity to invest in an employe ownership project. After much haggling, and much assistance from the South Bend area's congressional delegation, a deal was struck.

EDA loaned the City of South Bend $5 million, which, in turn, loaned the money (at 3 percent per annum over 25 years) to an employe trust fund. The trust bought the company, which issued 10,000 shares of common stock to the trust for the loans (including an additional $5 million obtained from private sources).

The employes traded in their pension rights for the stock, which is being held for them until they turn 65. In the interim they collect any stock dividends and production bonuses paid by the company.

During the first two years, the plan appeared to be going well. Employe attitudes, buoyed by the fact jobs were saved, translated into increased production, up to 25 percent more the first year. Profits rose -- aided by revised accounting practices, increased prices on SBL's basic product line (the belt-driven, flatbed lathe), and many tax and other fiscal breaks provided by ESOP. During it all, Boulis ran the place with an iron hand.

He apointed the new SBL's nine-member board of directors, nearly all of whom work for the company. The board, which had included a union member, appointed the ESOP committee that votes the unissued stock belonging to the employes. Records show, and interviews confirm, that both panels virtually always support Boulis -- despite his claim that the panels are made up of "independent thinkers."

Boulis and the board members have steadfastly refused to tell the other employe owners their executive salaries -- though reliable sources put Boulis' pay at $100,000 to $150,000 a year. However, the executives know the salaries of the unionized employe owners -- an average $7.50 an hour.

All decisions on new product lines and marketing procedures, on when bonuses will and will not be paid, are made by Boulis and his executives. They defend their actions by pointing to the company's $24 million net in annual sales -- nearly three times as much business as SBL did in 1975.

Norman G. Kurland, the Washington-based ESOP specialist who played a major role in setting up the South Ben plan, laughs and shakes his head at this.

"What you have at South Bend Lathe is industrial democracy in its absolute infancy," Kurland said. "There are going to be those kinds of problems because people are still wedded to the old ways of thinking. It can succeed. But there are going to be growing pains," he said.

Boulis blames the strike on the United Steelworkers, a union that is suing the SBL over the pension forfeiture and that he now accuses of "deliberately making unrealistic economic demands" on the company.

The union is pushing for continuation of cost of living benefits (1 cent per hour for each 0.3 percent of a point increase in inflation) and a 3 percent, 23-cent hourly pay raise. The company has offered a flat 10 percent pay increase for one year that includes a production bonus of $525.

"That is as good as we can do, and the union knows it," Boulis said.

"There's been a 15 percent drop in domestic machine tool orders and a 30 percent drop here [at SBL] over the last year," he said.

Boulis said the company needs an "independent union" that "will work with us instead of against us."

"We don't need an organization interested only in protecting its dues system and pension rights," he said.

Gene Cole, the international Steelworkers representative working with the strikers here, hotly denied that his union was out to "make an example of the South Bend Lathe ESOP," as Boulis charged. "We don't believe ESOP is a collective bargaining issue," Cole said, adding that that's why the union didn't push to put the firm's ESOP on the table in the current negotiations.

Instead Cole, said he believes Boulis has wrongfully used the ESOP as a tool to remove the last remaining obstacle to Boulis' total control of the company -- the union.

"From Day Number One of the ESOP, Boulis has had a vested interest in getting the union out of this plant," Cole said. "He couldn't have any more control now than if he bought the place outright. But he still wants us out, and that's what this strike is really about," Cole said.

Reynolds, meanwhile, says that if Boulis wants to get rid of the union, he is going about it the wrong way.

"We wouldn't need a union if we had received the fair treatment under the ESOP that we thought we had coming to us," he said in front of several approving union members. "But things are worse under Boulis than they were under Amsted, and there's no way these men are going to let the union go as long as they stay that way," Reynolds said.

For his part, Boulis said he will consider the charges that he has been too autocratic in his handling of the ESOP. "Hell, I might even tell them my salary," he said.

He also said he will push for a board of directors mostly composed of people from outside the company and that he will work harder, if and when the strike ends, "to improve internal communications."

"When we bought this company, I didn't have time for human relations. I didn't have time to go around patting people on their butts . . . . I didn't think about anything except keeping this business going and making money," Boulis said.

"But, now," he conceded, "maybe I'll find some time for human relations. I guess I'll have to."