Tag Archives | NCEO

Video Friday: Double Feature on Corporate Governance at ESOP Firms

ESOPCorporate Governance of ESOP Companies from SES Advisors

Without the founding entrepreneur steering the ship, ESOP companies’ corporate governance is of paramount importance. In this webinar, you will learn: the roles of trustees, directors and officers, how corporate governance affects value, and best practices for corporate governance in ESOP companies. Continue Reading →

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ESOP Appraisers: What is Really Needed

A new U.S. Senate bill would exclude appraisers of employee stock ownership plans (ESOPs) from the U.S. Department of Labor’s new definition of fiduciary. S. 1232 says,

Section 3(21)(A) of the Employee Retirement Income…Security Act of 1974 (29 U.S.C. 1002(21)(A)) is amended by inserting ‘and except to the extent a person is providing an appraisal or fairness opinion with respect to qualifying employer securities (as defined in section 407(d)(5)) included in an employee stock ownership plan (as defined in section 407(d)(6)).’

The DoL issued a proposed rule to revamp the definition of fiduciary under ERISA last Continue Reading →

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Corey Rosen to Retire from NCEO

Thirty years after founding the National Center for Employee Ownership, Corey Rosen plans to retire after the NCEO’s annual conference but also plans to volunteer four days a week.

In an interview in Pensions & Investments (ESOP proponent Corey Rosen still dedicated, even in retirement), Rosen predicted retiring baby-boomers will taking advantage of a capital gains tax deferral many will soon sell their stake in closely held companies to employee ownership plans (ESOPs).

“Mr. Rosen said a prime reason ESOPs are terminated is successful ESOP-owned companies are sold.” However, he also noted that several have failed, including several where companies were already in severe trouble by the time them committed to an ESOP and greater employee participation.

I studied one such company while I was under a grant from the National Institute of Mental Health, Rath Meatpacking, more than 25 years ago after being inspired by Rosen. I saw the principles Rosen has strived for work as line staff at Rath generated hundreds of money saving ideas. Unfortunately, it was too late for them but Rosen has gone on to help many ESOP companies make the successful transition to a culture that is not only top-down but bottom-up with regard to ideas.

A key conclusion of the center’s various studies over the years is that employee ownership succeeds not just when employees have a financial interest. Mr. Rosen said the most financially successful companies allow employees creative input to contribute their ideas through work teams and other channels.

The National Center for Employee Ownership has 2,700 members. They include not just employee-owned companies, but also public ones with ESOPs such as Procter & Gamble Co. and those with non-ESOP stock ownership plans like Starbucks Corp.

Loren Rodgers, a project director who has worked at the NCEO since 1995, will take over Rosen position. I wish her well.

I hope Rosen will consider putting his considerable talents to work as a volunteer in efforts that convince SRI funds and public pension funds to place greater emphasis on weighting their portfolios a little more towards companies with significant ESOPs and significant employee participation programs.

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Fix CEO Compensation by Broadening Incentive Pay

The defenders of executive compensation argue that senior executives make the most significant contribution to a company’s success; ergo, outsize compensation is justified. But the NBER Shared Capitalism Research Project has shown the opposite: Distributing rewards across the corporation—sharing them with workers—is the most efficient way of making businesses more successful. Motivated employees are more productive and spur innovation in products and processes…

Freeman, Blasi, and Kruse propose a simple way to encourage companies to follow the Googles and Wegmans of the world: Allow them to deduct incentive pay as a cost of business only if they offer the same incentive program to all workers. In other words, don’t give tax breaks to companies that provide stock options and bonuses to only a few executives. This would correct a major loophole in the tax system with which corporate executives have been enriching themselves at the expense of their stockholders and taxpayers. (The U.S. Tax Code does not allow the deduction of salaries beyond $1 million as a business expense, but it does allow companies to deduct as a cost of business any amounts paid as incentive compensation.)

This proposal is not as radical as it may seem. It is, rather, American capitalism at its best, the extension of a system that has engendered the success of such major companies as Google (GOOG), Apple (AAPL), and Procter & Gamble. The same principles already apply to pension and health-care plans—these are deductible as a cost of business only when they cover every employee. Compensation should be subject to the same rules, which will encourage more companies to extend incentive pay to all workers. And most importantly this change would make U.S. businesses more productive while benefiting workers.

via How to Fix Oversize Executive Compensation – BusinessWeek, 3/25/2011.

According to Corey Rosen, National Center for Employee Ownership:

The ideas here make sense. We have become infatuated with the idea that companies rise and fall based on a few key people. Yet study after study (and the rhetoric of CEOs insistent that “people are our most important asset”) show that the level of employee engagement at work is the single most important determinant of corporate performance. Engaged employees come up with the ideas, large and small, that move companies forward. Companies that share ownership widely grow 2-3% per year faster than would have been expected to otherwise, for instance, their employees have three times the retirement assets, and they are much less likely to go bankrupt.

As I recall, much of the research into employee ownership and worker participation showed tremendous gains when these factors were linked. There was a raft of experiments in the 1970s and 1980s. I, myself, was somewhat involved with Rath Meatpacking when it became the largest worker-owned firm in the United States. In many of these situations productivity shot up but management shut them down because employee participation took power away from them… especially middle management. I like the ideas advocated by Freeman, Blasi, and Kruse. Unfortunately, the Business Roundtable and the US Chamber of Commerce are likely to express strong opposition.

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ESOPS Gain at Indian IT Firms

Indian IT firms are witnessing a significant jump in attrition levels.  Retention has become a key challenge. Several IT firms are set to implement Employee stock option plans (ESOPs), reports Bibhu Ranjan Mishra from the Business Standard. Infosys discontinued its ESOP policy in May 2003, saying “the employees are not keen on it.” However, in June this year, when Infosys Employee Welfare Trust announced the distribution of equity shares to those eligible, at least 140 employees serving notice periods withdrew their resignations overnight. (ESOPs back in IT firms to reduce attrition, SiliconIndia, 8/11/10)

Over the years, the US-based National Center for Employee Ownership (NCEO) has conducted and reported on research on employee ownership and corporate performance. The research comes to a very definite conclusion: the combination of ownership and participative management is a powerful competitive tool. Neither ownership nor participation alone, however, accomplishes very much. (Research on Employee Ownership and Corporate Performance) Indian IT firms might do well to combine their ESOPs with participative management programs, which will give employees even more reason to feel they have a meaningful long-term role in their company.

A survey by the ESOP Association and the Employee Ownership Foundation found 23% of respondents said their Employee Stock Ownership Plan (ESOP) was created to provide an additional employee benefit, and another 21% stated the attraction of the employee ownership concept as the reason. Eighty-four percent of respondents agreed that the ESOP improved motivation and productivity, and 78% of companies advertise the fact that they are employee owned through Web sites, in company literature, and in marketing campaigns, according to a press release. (Majority of ESOP Sponsors Offer another Retirement Plan, PlanSponsor.com, 8/11/10)

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The False Promise of Pay for Performance

The False Promise of Pay for PerformanceMany, including this reviewer, called Bebchuk and Fried’s Pay without Performance: The Unfulfilled Promise of Executive Compensation the best corporate governance book of 2004. James McConvill’s The False Promise of Pay for Performance: Embracing a Postive Model of the Company Executive, largely a critique of Pay Without Performance, deserves similar attention.

Bebchuk and Fried clearly demonstrated that many features of executive pay are better explained as a result of shear managerial power, rather than arm’s-length bargaining by boards of directors. Their recommendations on improving executive compensation are aimed at eliminating or reducing some of the most egregious problems and are written to shareholders, since such reforms are not likely to be raised by “independent” directors, as independence is currently defined. One of their major points is that board members should not only be independent of CEOs, they should also be dependent on shareholders. Continue Reading →

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