Obstacle to Sustaining an ESOP: A Successful Company

We have recently discussed ESOP Sustainability and The Legacy of an ESOP Company. Sustaining Employee Ownership for the Long Term discusses how a company's success can be one of the biggest obstacles to sustaining an ESOP or other employee ownership program in the long-term. The article identifies six solutions to meeting the obligation to provide liquidity to shareholders, noting that only the first three solutions are sustainable solutions:

1. Cash belonging to employees
   
2. Cash belonging to the company
   
3. Government subsidies (via tax deductions) made available for this purpose
   
4. New (outside) investors
   
5. Sales of company assets
   
6. Sale of the company itself

The article discusses focusing on three sources of funding:

1. The Internal Stock Market – The article cites SAIC and CH2MHill as examples of companies that have adopted an effective internal stock market that allows employees to buy and sell shares from each other. In order to implement this kind of system, there are SEC registration issues that will need to be resolved.
   
2. Tax Subsidies to Support Employee Ownership – This source refers to the powerful tax benefits of employee stock ownership plans (ESOPs) and how they can free up additional cash.
   
3. Cash Management Techniques to Smooth Cash Demands on the Company – This section discusses enabling participants to sell shares prior to retirement to smooth cash demands, paying employees in installments, using promissory notes, and using the ESOP to borrow cash to purchase the stock.

The article also provides an excellent final consideration:

As you grapple with the challenge of addressing the liquidity demands associated with internal stock ownership, it is important to keep in mind that the means by which a company's employees are able to sell their shares will also go a long way toward determining the system by which employees will acquire their shares. After all, the disposition of a share by one party is necessarily the acquisition of the share by another party. In effect, the issue of how employees should "divest" stock and the issue of how they should "acquire" stock are simply two sides of a single coin. The fact is that, to be successful and sustainable, a system of internal stock ownership must necessarily effectuate both dispositions and acquisitions of shares – and through the same mechanisms. As we work to design a system of employee ownership that assures sufficient liquidity to the employee-shareholders, then, it is essential that we not lose sight of the overriding need to create an ownership system that offers fair and appropriate provisions regarding the means by which employees will acquire shares in the first place and go on to participate in the company as inspired, committed and engaged employee-owners. Don't kill the patient in order to save it!