More US Sugar ESOP and California’s Franchise Tax Board (FTB) Notice 2008-4

The July 1, 2008 Employee Ownership Update is online and discusses the following:

• Florida Agrees to Buy U.S. Sugar; Employees Will Get Windfall
  
• California Offers Settlement for Taxpayers in Abusive ESOPs
  
• NASPP Survey Shows ESPPs Somewhat More Conservative

The Update discusses how Florida is Purchasing U.S. Sugar Land and the latest news related to the U.S. Sugar ESOP Issues:

Laid-off hourly employees will get one year's severance pay, and salaried employees will get two years. Employees will receive incentives to stay on during the transition.

The price offered by the state, which amounts to about $350 per share, is a considerable premium over a previous bid of $293 per share. The approximately 3,800 U.S. Sugar ESOP participants (about 1,700 of which are current employees) own about 35% of the company through an ESOP, so they will divide approximately $650 million among them.

The Update also notes that ESOP valuation practices would have required that participants be paid at a non-control price:

They now say the current offer just proves their point, but ESOP valuation practices would have required these former employees to be paid out at a non-control price, whereas the offers all included a premium for control. The circumstances of the sale to the state, which clearly only had an interest if it could take full control, suggest that a substantial control premium could have been in order.

The Update also covers California's Franchise Tax Board (FTB) Notice 2008-4 – Resolution of Certain ESOP Transactions and notes that taxpayers seeking resolution need to file before September 13, 2008. It also discusses a 2007 equity compensation survey that shows that employee stock purchase plans (ESPPs) have become more conservative since accounting rule changes became fully effective in 2006.

Study Asserts Broader Employee Ownership and Participation Improves Company Performance and Social Welfare

A press release announced that Employee ownership and participation effects on firm outcomes, a study conducted by Brent Kramer, provides evidence that majority employee-owned businesses are more productive than their traditionally-owned counterparts:

Many theorists have suggested that the rarity of employee ownership is prima facie evidence that such firms could not be as efficient as traditional firms, because otherwise they would be more common. But institutional and financing constraints may be a more realistic explanation for their rarity, and it is important for policy purposes to investigate efficiency objectively...

Using a matched-pair differences test, sales per employee is substantially and significantly higher for the employee-owned group of firms. This "employee-owned advantage" is significantly greater among smaller firms, and (holding firm size constant) improves as the dollar value of the average employees' ownership stake in firm stock goes up. Holding both firm size and employee stake constant, the employee-owned advantage is substantially (though not significantly) greater in the large group of firms which are 100% owned by their ESOP Trusts...

Resistance to broadening employee ownership may come in part from academic arguments that such a structure must reduce firm (and thus social) efficiency. This study belies those unjustified theoretical arguments. Broader employee ownership and employee participation in firm management, which have intrinsic social benefits, improve firm outcomes—and thus social welfare—as well.

Here is a copy of the press release:

WASHINGTON, June 18 /PRNewswire-USNewswire/ -- Recent research by Brent Kramer, a doctoral candidate at the City University of New York, provides strong evidence that majority employee-owned businesses have a significant advantage over comparable traditionally-owned businesses in sales per employee. The average advantage, $44,500, means that a typical 200 person ESOP firm could be expected to have an almost $9 million annual sales advantage over its non-ESOP counterpart. Sales per employee is the total of a companys sales divided by the number of employees, and is a commonly used measure of a companys productivity.

A few highlights of the study:

• Using standard statistical methods, it was found that the average sales advantage for the ESOP firms in the study was $44,500, or an average of an 8.8% sales per employee advantage over their non-ESOP counterparts in the same industry and of the same size.
  
• It was found that firms that ask for non-management employee input into innovation in work processes have a greater employee-owned advantage in sales per employee.
  
• Kramers research indicates the sales per employee advantage for the 50% plus ESOP companies compared to non-ESOP companies is less for larger employers.

What is important about this study is that it substantiates what we have been saying about ESOP companies being more productive for the past 30 years. When matched along side non-ESOP firms, employee owned companies are more productive as defined by the traditional productivity measure of sales per employee, said J. Michael Keeling, President of The ESOP Association.

The study, Employee Ownership and Participation Effects on Firm Outcomes, was conducted by Brent Kramer, an economics doctoral candidate at the time of the study and now a Ph.D. The Employee Ownership Foundation, the 501(c)(3) affiliated foundation of The ESOP Association provided funding for the research and The ESOP Association contributed membership information for the study. A total of 328 ESOP firms and over 2,000 matching non-ESOP firms were included in the study.

Updated List of Largest Majority Employee-Owned Companies

The NCEO’s The Employee Ownership 100 has been updated and is now online:

America's Largest Majority Employee-Owned Companies
June 2008

Companies must have at least 50% of their stock owned by an ESOP, a stock purchase plan in which most full-time employees can participate, a profit sharing plan or other trust, or some combination of such plans. Companies are ranked by the number of total employees in the U.S. and worldwide.

The latest Employee Ownership Report notes that, consistent with prior years, employment at the 87 returning companies grew at twice the rate of the economy as a whole. It also provided a breakdown of the major industries represented in the list: manufacturers (15), engineering companies (14), construction companies (10), and supermarkets (9).

ESOP Sustainability

We have spent some time examining Why the Number of ESOPs is not Growing at a Faster Rate. One of the major components of the number of ESOPs is the ESOP termination rate. The second phase of a recent ESOP Plan Termination study found that less than 2% of ESOP companies terminated their ESOP each year. While a common perception is that the repurchase obligation is the primary reason for ESOP termination, the study found that over half of the ESOP terminations are a result of receiving an attractive offer the company could not turn down, even though they could handle the repurchase obligation. Other reasons included the aforementioned repurchase obligation, dissatisfaction with the ESOP, and financial difficulties of the company.

Sustainability of ESOP Companies Debate Intensifies discusses the sustainability of ESOPs and asks if there is "something about the ESOP model of employee ownership that makes it impossible to sustain employee ownership through an ESOP more than 10 to 15 years" and explores reasons why ESOPs are being terminated:

1. The trustee is required to maximize the value of plan assets, causing them to accept attractive offers to purchase the company:
   
   Another issue of sustainability comes up with dealing with the ERISA law that the trustee of the ESOP is to maximize the value of plan assets, putting into play the question of does the trustee accept any offer to purchase the company that increases account balances? Can sustainability be changed with a tweak in ERISA law for ESOPs? Is such a tweak desired, or even obtainable given that this law is not a tax law, but a law that would be in the Congressional labor committees which do not have a history of being favorable to ESOPs as retirement savings take priority over the ESOP's ownership purpose, in the labor committees.
   
   As we discussed above, this is the biggest reason for ESOP termination.
   
   
2. The company cannot support the repurchase obligation or would prefer to utilize their cash for other purposes.
   
   
3. The second generation of leadership doesn't support the ESOP (even though they were likely selected by the same leadership that established the ESOP):
   
   The most intriguing one is about how the first generation of ESOP managers, particularly the first CEO of the company when it became ESOP, who loves being ESOP, plans for a succession that results in a new CEO who also values employee ownership? ESOP Association records show that many ESOP companies that drop membership in the Association due to ESOP termination have a characteristic that is simply that the company's first ESOP CEO, and sometimes CFO, have been succeeded with what is called second generation ESOP company management. Often these men and women, in the second generation, see the ESOP as a hindrance to proper use of the companies capital because repurchase obligations are soaking up so much of its available capital. Oddly, often the first generation ESOP leaders hand pick their successors, and assume that their successors will be pro-ESOP.
   
   
4. The participants have been effectively split into a group of "haves" and "have-nots", resulting in the latter group not having the same level of participation in the ESOP. This problem can occur in mature ESOPs when the ESOP loan has been paid in full and the company hasn't adjusted its allocation strategy accordingly to ensure that new employees do not become "lesser" owners than the senior employees that were around when the loan was being repaid.

Broad Dissemination of Employee Ownership Teaching Materials

Earlier this year we discussed the first ever MBA Course in Employee Ownership and the benefits of including employee ownership in academic discussions. A recent press release discusses how the Employee Ownership Foundation and the Foundation for Enterprise Development are providing a grant "to disseminate employee ownership teaching materials":

The Aspen Institute is an international nonprofit organization dedicated to fostering enlightened leadership and open-minded dialogue. As part of the Institute's Business and Society Program, the Center for Business Education (CBE) maintains close ties with major MBA programs in 23 countries. A grant to disseminate employee ownership teaching materials from the Foundation for Enterprise Development (FED) to the CBE of the Aspen Institute received substantial funding from the Employee Ownership Foundation. This grant funds the CBE network, publications, distribution systems and awards program to identify and disseminate employee ownership teaching materials to over 110 business schools. This collaborative project by the Foundation, FED, and CBE was initiated in March 2008.

Here is some additional information on the various organizations mentioned in the press release:

• The Foundation for Enterprise Development (FED) was established by Dr. J. Robert Beyster, founder of Science Applications International Corporation (SAIC), to promote "business principles and practices that encourage free enterprise and advance science and technology innovations with impact on nationally important interests."
  
• According to the press release, the Employee Ownership Foundation is the ESOP Association's "affiliated 501 (c)(3) organization dedicated to promoting employee ownership" and the core cause of the Foundation "is the belief that employee ownership will improve American competitiveness, increase productivity through greater employee participation, and strengthen our free enterprise economy."
  
• The Aspen Institute is a nonprofit organization "dedicated to fostering enlightened leadership and open-minded dialogue".
  
• The Business and Society Program is an Aspen Institute program designed to develop leaders:
  
  The Business and Society Program is dedicated to developing leaders for a sustainable global society. Through dialogues and path-breaking research, we create opportunities for executives and educators to explore new pathways to sustainability and values-based leadership. BSP's websites, www.CasePlace.org and www.beyondgreypinstripes.org, are the leading sources of innovative curriculum in top business schools around the world. The Business and Society Program is an independently-funded policy program of the Aspen Institute.
  
  
• The Aspen Institute's Center for Business Education (CBE) is part of the Business and Society Program. It "encourages future business leaders to innovate at the intersection of corporate profits and social impacts. Our goal is bold and long-term: to radically re-orient the MBA degree to embrace the principles of corporate citizenship and sustainability."
  
  
• CASEPLACE.org, an Aspen Institute online resource, contains "up-to-date case studies, syllabi, and innovative teaching materials on business and sustainability — from corporate governance to sustainable development." The employee ownership topic currently contains 28 entries.
  

Employee-Owned Top Small Workplaces, IEI, HR 333, and Broad-Based Equity Grants

The May 15, 2008 Employee Ownership Update is online and discusses the following:

• Indiana Initiates ESOP Support Program
• Hinchey, Rohrabacher Introduce Pro-ESOP Resolution in Congress
• Many Compensation Consultants Ignore Research Supporting Broad-Based Equity Plans
• Take the NCEO Survey on Equity Compensation in Closely Held Companies
• Winning Workplaces Webinar on Employee Ownership

The Update discusses the Indiana's ESOP Initiative (IEI) and H. Con. Res. 333: Expressing continued support for employee stock ownership plans. It also discusses how five of the 2007 Top Small Workplaces are employee-owned and how two of the five, Reflexite and Phelps County Bank, will be presenting an employee ownership webinar, Building an Ownership Mentality Among Employees. For more information about the Top Small Workplaces and the presenting companies, here are some links to prior blog posts:

• ESOPs in Existence for At Least 25 Years (4/17/08)
• Eudaimonic Well-Being and Factors in Happiness (4/7/08)
• More Top Small Workplaces Coverage/Employee Ownership Month (10/9/07)
• In the News: Benefits, Risks, and Challenges of Employee Ownership, Maintaining an Ownership Culture as the Company Grows (10/04/07)
• In the News: Top Small Workplaces, High Retention Rates, Thinking Entrepreneurially, and Feeling Empowered (10/2/07)
• Combining Broad-Based Employee Ownership and Participation in the Management Process (5/7/07)

The Update also discusses how many compensation consultants ignore the evidence that links broad-based equity grants to improved corporate performance, noting that "there is, in fact, ample evidence linking broad-based equity grants to improved corporate performance, while equity grants to top executives produce at best mixed results.":

It's hard to say whether the continuing bias is the result of simple ignorance, a self-serving desire to tell executives (who pay compensation professionals' bills) that only executives matter, or a too-facile assumption that individuals below top executives rarely affect how the company does. The continued existence of this bias, however, remains a major barrier to more progress on broad-based grants.

ESOPs Contribute to a More Fair and Just Society

Opinion 2: House Resolution Celebrate ESOP Successes is an opinion piece written by the President of the ESOP Association. It recognizes the bi-partisan efforts to affirm ESOPs in H. Con. Res. 333: Expressing continued support for employee stock ownership plans and urges all members of Congress to "get on board and co-sponsor House Concurrent Resolution 333 for a more fair and just society":

Since 1974, the ESOP model of employee ownership has been most effective in transferring ownership at a substantial rate to average-pay employees over a short period of time.

Thanks to ESOPs, millions of Americans have become significant owners in the companies where they work. Because in a free enterprise system, ownership is both a reward and a risk, there are cynics who question whether average-pay employees should be exposed to the risks of ownership.

Other than a degree of irritation that these cynics have an elitist "let them eat cake attitude" toward hard working, middle class Americans, everyone should take notice of the overwhelming data collected over the past 30 plus years of ESOP success stories for ESOP participants and their companies.

The op-ed shares The Benefits of ESOPs and Employee Ownership to Companies and The Benefits of ESOPs and Employee Ownership to Employees. It also discusses The Economic Performance of ESOP Companies and the importance of making ESOPs a major part of building a "more prosperous, more just, and more equal" society.

Bear Stearns, High Concentrations of Employer Stock, Statistics: Company Stock in 401(k) Plans

The Week That Shook Wall Street: Inside the Demise of Bear Stearns discusses the details behind the sale of Bear Stearns to J.P. Morgan Chase & Co. Since it is estimated that about 30% of Bear Stearns were employee owned, the issue of being Too Concentrated in Employer Stock is again being revisited. The Job/Stock Double Whammy discusses how employees that are heavily invested in employer stock are at risk of losing their jobs and their savings. It mentions how owning company stock was a part of their culture, as well as for Lehman Brothers Holdings Inc. and Merrill Lynch & Co., who reportedly are each more than 25% employee owned. The article also contains comparisons to Enron and Lucent.

The Employee Benefit Research Institute (EBRI) has released an information sheet to help put the statistics into perspective:

The recent collapse in the value of Bear Stearns shares has led to new interest in the role of company stock in 401(k) plans.

The nonpartisan Employee Benefit Research Institute (EBRI) has done extensive analysis on company stock in 401(k) plans. The primary source of data on holdings in company stock is the EBRI/ICI Defined Contribution Participant Database. The most recent annual publication from this database is for end-of-year 2006 and is available online at www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3838

The August 2007 EBRI Issue Brief reporting those results found that, on average, 401(k) participants today hold significantly less of their account assets in company stock than they did in 1996. Among the highlights about company stock from that latest EBRI/ICI report:

• In 2006, average holdings of company stock in 401(k) plans amounted to 11 percent of total assets, down from 19 percent in 1996 (see Fig. 20 in the August 2007 Issue Brief, url above).
  
• Overall, about 45 percent of 401(k) participants have company stock available to them as an option. Because primarily large, publicly traded companies tend to offer company stock in their 401(k) plan, only 3 percent of 401(k) plans offer company stock as an option (see Fig. 22).
  
• There is significant variation in company stock holdings. The EBRI/ICI database shows that, of those in plans with company stock as an option, 7.3 percent of 401(k) participants have 90 percent or more of their 401(k) assets in company stock, while 44.5 percent have no company stock at all (see Fig. 32).
  
• Among recently hired 401(k) participants in plans that offer the option, 42 percent had company stock in their accounts. This is down from 60 percent in 1998 (see Fig. 37).

Updates:

• Increasing the Perceived Value of Employee Ownership, Bear Stearns, Employee Ownership and the Best Companies to Work For (4/6/08)
• Countering Negative ESOP Coverage with the Facts (3/26/08)
• Differences between Bear Stearns and Enron (3/19/08)

Related Links:

• Johnson & Perkinson Announces Filing of Employee Retirement Class Action Complaint Against The Bear Stearns Companies Inc.
• Hagens Berman Files Third Lawsuit Against Bear Stearns
• Bear Stearns: Crisis and “Rescue” for a Major Provider of Mortgage-Related Products
• A Bear swimming in the murky waters of corporate law
• AGREEMENT AND PLAN OF MERGER by and between THE BEAR STEARNS COMPANIES INC. and JPMORGAN CHASE & CO. - DATED AS OF MARCH 16, 2008
• Bear investors may seek restraining order on buyout
• Bear Stearns and Negative Media Coverage
• The New Retirement Drama: ESOPs
• When You're Invested Too Much in Work
• Bear Stearns braces for legal battles
• Here we go again.
• A Lesson From Bear: Don't Hold Large Chunks of Company Stock
• A Bear Market for 401(k) Plans
• Bear’s Ills Draw Company Stock "Investigation"
• Bear Stearns and Employee Ownership
• The Job/Stock Double Whammy
• The Week That Shook Wall Street: Inside the Demise of Bear Stearns

Employee Decisions Increase Profits/Large Private Company Equity Plans

The March 14, 2008 Employee Ownership Update is online and discusses the following:

• Study Shows Investors Largely Ignoring Options Impact on Accounting in Tech Sector
• The Power of Ten
• Employee Ownership Growing in Europe
• Survey of Large Private Companies Explores Equity Plan Use
  

VATEX (Richmond, VA)

The Update discusses how VATEX, an ESOP-owned supplier of promotional materials, involved employees in the decision making process and ultimately increased profits. The industry has historically used the dozen as their standard shipping unit. Using dozens was creating errors in box counts and causing a high rate of returns. Employees decided to ship by tens instead. This decision reduced errors and increased profits.

This example builds on our discussion earlier this week on the relationship between employee ownership and corporate performance in Participative Management is a Key Driver to Exceptional Business Performance. The Update shared the Vatex example to highlight the relationship between employee ownership and corporate performance:

"Getting people to work harder (trying to work faster with fewer distractions on counting by dozens, for instance) adds only a little to the bottom line; giving people the tools, incentives, and structures to make smarter decisions adds a lot."

Employee Ownership Growing in Europe

The Update discusses the number of employee owners (8.2 million) and employee owned assets (260 billion Euros or $406 billion) owned by the largest 2,500 European countries stated in the latest European Federation of Employee Share Ownership (EFES) Newsletter.

Survey of Large Private Companies Indicates More Reliance on Short-Term Incentives

The Update discusses the results of Private Company Incentive Pay Practices, an October 2007 survey and research report by WorldatWork and Vivient Consulting. The purpose was to answer "how do private companies use short and long-term incentives to motivate, retain and reward their people?":

Respondents use short-term incentives (STIs) extensively, with nearly 80 percent reporting an STI plan at their private companies. In contrast, only about one-third of respondents report having a long-term incentive (LTI) plan in place, which reflects the cost and complexity of implementing such a plan for a private company.

The large size of companies surveyed may make the results less relevant to smaller ESOP companies:

The size of responding organizations ranges from more than $5 billion in revenue to less than $100 million in revenue. The corporate status of responding organizations was primarily C Corp. (37 percent), LLC (26 percent) and S Corp. (20 percent), with a small number of subsidiaries (4 percent) and partnerships (3 percent) also participating.

The research report discusses short-term incentives, bonus plans, long-term incentives, and deferred compensation and summarizes the results as follows:

Private companies rely more heavily on short-term incentives, such as bonuses, than long-term incentives to reward and motivate employees. Where long-term incentives are used, they are reserved for the upper levels of the organization.

Private companies with LTI plans favor stock options and long-term performance awards over other vehicles. In fact, restricted stock—an increasingly popular vehicle at public companies—is used by only 14 percent of the survey respondents that report LTI plans. This indicates that private companies prefer not to grant real ownership and instead favor cash-based plans or stock options that provide liquidity under limited circumstances, such as a change of control.

Study Indicates Stock Options Accounting Reforms are Having Little Impact on Investors

The Update discusses an October study that indicates that the stock option accounting reforms are "having less impact than was expected when they were implemented":

'The Weisel report indicates that many investors are not even bothering to look at the information. Ironically, it is still common to hear advisors urging companies to find ways to minimize the apparent impact of equity plans on their income statements, even though there is not much reason to think it has any effect on share prices."

Comparing Employee Ownership to Hedge Funds, European Federation of Employee Share Ownership (EFES), British Parliament Study

What do employee ownership and hedge funds have in common? compares employee ownership in Europe and the U.S. to the global capitalization of all hedge funds:

Employee owners in Europe and the U.S. now hold approximately 1.260 billions Euro (1.934 billion US Dollar) quite similar to the global capitalization of all hedge funds across the world in 2007 (1.160 billions Euro (1.780 billion US Dollar). Any further comparisons are a matter of opinion.

The quoted statistics were obtained from the European Federation of Employee Share Ownership (EFES) website. EFES "acts as the umbrella organization of employee owners, companies and all persons, trade unions, experts, researchers, institutions looking to promote employee ownership and participation in Europe." Here is the excerpt from the EFES Newsletter – March 2008:

Europe – USA and the hedge funds
USA: Some days ago, we got the "Statistical Profile of Employee Ownership" from the National Center for Employee Ownership in the USA. Employee Stock Ownership Plans (ESOPs) are the most popular employee ownership scheme in the US – they have now 9.774 ESOPs, with 11.2 millions employee owners, holding 630 billions Euro in assets. Looking at all other employee ownership schemes besides ESOPs, they have some 25 millions employee owners, holding more than 1.000 billions Euro in assets.
Europe: Considering the 2.500 largest European companies, we have now 8.2 millions employee owners across Europe, holding 260 billions Euro (see our first "Annual Economic Survey of Employee Ownership" will be soon made public).
Europe and USA: Employee owners hold now some 1.260 billions Euro, quite similar to the global capitalisation of all hedge funds across the world in 2007 (US$ 1.700 billions = 1.160 billions Euro).

In a related blog post, the Employee Ownership Blog discussed the EFES and an All Party Parliamentary Group on Employee Ownership established by the British Parliament to Study Employee Ownership:

The group is seeking evidence on the following: productive employee engagement, employee cooperation, corporate social responsibility, lack of awareness among business owners, advisers, financial institutions and policy makers, and inadequate government appreciation of and support of the co-owned business sector.

Participative Management is a Key Driver to Exceptional Business Performance

Is There a Link Between ESOPs and Better Company Performance? discusses how a "developing body of research suggests that exceptional business performance for ESOP firms is driven by a change from the traditional hierarchal business model":

Organizations often realize positive changes in employee morale and working behaviors after implementing an employee stock ownership plan. Those somewhat intangible benefits occur alongside measurable business results over similar firms without ESOPs. The developing body of research suggests that a key driver to exceptional business performance for ESOP firms is a change from the traditional hierarchal leadership model.

Here are the four main sections of the article along with my comments:

ESOP definition and history

This section provides a brief description of ESOPs, stating that they can be "very effective vehicles for transitioning company ownership from key shareholders, for raising capital, and for creating organizations that enjoy the benefits of an ownership culture." It also discusses Louis Kelso's vision and provides some historical ESOP statistics.

Thriving or surviving?

This section discusses research on employee ownership and corporate performance that "suggests that employee-owned firms are profitable, productive and display better shareholder value," providing benefits to employees, companies, and society. It also discusses results from the Employee Ownership Foundation's ESOP Economic Performance Survey.

Participative management may be key

This section discusses how combining employee ownership and participative management can increase employee motivation and build an ownership community:

In a 1987 study, the National Center for Employee Ownership, a nonprofit organization, analyzed 270 companies and found that those who combined employee ownership with participative management grew 8 percent to 11 percent faster annually than otherwise expected. This relationship was corroborated by later studies by the U.S. General Accounting Office (now called the Government Accountability Office), which noted that increased productivity was achieved only with higher levels of worker influence or increased voting rights.

Interestingly, research shows that higher worker satisfaction resulted when workers perceived participation and influence, or were simply provided opportunities to participate in decision-making. Satisfaction was not linked to ownership stake, or to the value of an ESOP account.

The relationship between ownership and participation is easy to understand—the element of ownership provides long-term perspective and incentive. Participation helps to empower workers to various degrees, and to support answers to the question "Why do I care?" by providing an avenue for shaping their futures and the future of their firm. In the best cases, it erodes or blurs any worker perception of leadership as "them" versus employees as "us," and begins to build an ownership community.

Moving from a traditional hierarchal leadership model to an open-book management program for managing financial results is a significant cultural and practical change. Participative management requires:

• Articulating a clear and compelling mission and vision.
• Creating a vehicle for communication among all levels and areas of the organization.
• Providing simple tools for employees to improve their work and affect the bottom line.

Crucial to success is training employees to connect the dots in the relationships between the impact of their day-to-day tasks to whatever key metrics are established, such as scrap rate or cost of sales, and how that in turn affects expense and firm profits.

Is it right for your organization?

The article concludes by suggesting that now is a good time to review business and human capital objectives and how an ESOP may support these objectives:

"The start of a new year is a good time to review business and human capital objectives as they relate to your organization's strategy for aligning business needs with human capital needs. If you have not already, it may be time to consider whether an ESOP supports your organization's business objectives."

More LaRue, Global Equity Survey, Open-Book Management

The March 3, 2008 Employee Ownership Update is online and discusses the following:

• Supreme Court Says Individuals Can Sue Retirement Plan Fiduciaries; Implications for ESOPs Unclear
  
• Survey of Multinational Companies Shows Changes in Equity Practices
  
• New NCEO Board Members Elected
  
• 2008 National Gathering of Games Conference, April 30-May 2, 2008
  

More LaRue

The Update discusses LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) and provides a separate page with more analysis and ESOP implications.

"On February 20, 2008, in LaRue v. DeWolff, Boberg & Associates (No 06-856), the Supreme Court unanimously concluded that individuals do have the right to sue for individual monetary damages under Section 502(a)(2), although a concurring opinion in the case written by Chief Justice Roberts argued individuals have to exhaust administrative remedies first.

Global Equity Incentives Survey 2007

The Update discusses the results of the PriceWaterhouseCoopers Global Equity Incentives Survey 2007:

PwC's annual global equity survey covers a wide range of topics related to global equity compliance, design and administration, including: stock option expensing, compensation strategy and design, tax planning and compliance, global coordination, plan administration, and employee communications. The 2007 Survey will build on the insights gained over the last four surveys to help multinational companies as they monitor trends in equity compensation and plot their strategic position within their markets and industries. These results will become a useful tool for all of those impacted by the transformation of equity in the hands of employees: human resources professionals, finance executives, tax professionals, regulators, consultants, and employees.

The Update notes that companies are half as likely to offer options (at all levels) than they were in 2003. For more information about the results of the survey, here are links to a webcast, webcast slides, and executive summary.

Open-Book Management

The Update discusses the 2008 National Gathering of Games Conference, which is from April 30 – May 2:

Open-book management transforms organizations and gives them a major advantage over others who keep employees in the dark. It's not just about generating profits, cash and wealth but also about distributing it for the good of everyone involved – giving those who embrace open-book management a spirit of generosity and a willingness to openly spread the word to help each other succeed.

New Board Members

The NCEO also announced the new NCEO board members.

Statistics: Number of Baby Boomers, Baby Boomer Business Owners, and Potential ESOP Universe

How many baby boomers are there?

There are about 78 million baby boomers in the United States.

A portion of the baby boomers are business owners and will eventually need to transition the ownership of their business. We have discussed how many business owners, if they took the time to identify their estate and succession planning objectives and considered all of their alternatives, would find an ESOP to be a great fit for their situation.

Just how many baby boomer business owners are there?

As I stated in a prior post, I have not been able to locate a single reliable source document that provides a reliable answer to this question. Let’s take a closer look at some of the numbers:

• According to The Small Business Economy: A Report to the President 2007 (page 5), there are 26.8 million small businesses (defined as a business with fewer than 500 employees) in the United States. Assuming 40% of these businesses are baby boomers that will need to transition their business in the next five to 20 years, the number would be 10.7 million companies. The number assuming 50% or 60% is 13.4 million or 16.1 million, respectively.
  
• According to the Number of Businesses by State (page 300), there were 6 million employer firms, 20 million nonemployers, and 16 million self-employed in 2005.
  
• According to the Characteristics of Self-Employed Individuals (page 320), 59% are currently age 45 or older (30% are age 55 or older, and 9% are age 65 or older) in 2005.
  
• According to the Statistics about Business Size (including Small Business) from the U.S. Census Bureau, there were 25.4 million firms (5.9 million with payroll) in 2004.

I had previously used seven to 12 million as the estimated number of companies looking to transition the ownership of their company in the next five to 20 years in two previous posts. Because I do not want to overstate the number, I will now refer to the number as more than 5 million.

How many of these companies are truly ESOP candidates?

Coming up with an accurate estimate of this number is even more challenging than determining the number of baby boomer business owners looking to transition the ownership of their company. Some thoughts on ESOP’s and More thoughts on ESOP Trusts provides an insightful perspective of ESOPs from someone that does not specialize in ESOPs. Corey Rosen posted his comments on the first blog post and the second blog post expands on an email discussion between the two:

Corey was telling me that the NCEO thinks there are about 150,000 companies that could economically qualify as an ESOP company. I would probably put that number at around 300,000 which corresponds with the number of private businesses that are in the middle market. (Sales between $5MM and $1BB)

Is the potential ESOP universe 150,000 or 300,000 or a different number? That is a discussion that will need to be continued. One thing that is known is that the potential ESOP universe is much greater than 9,774 (the estimated number of ESOPs in 2007), which brings us back to the question of Why the Number of ESOPs is not Growing at a Faster Rate.

If you have seen or calculated more specific numbers to any of the numbers discussed above, please let me know.

Employee Ownership and Corporate Performance

The NCEO has updated their Employee Ownership and Corporate Performance page, which documents the 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…The findings also seem to apply primarily to closely held companies. Research indicates that public companies generally do not view employee ownership as much more than another corporate benefit. For this and other reasons explored below, the relationship between employee ownership and corporate performance in public companies is ambiguous."

The page discusses the following studies:

• The 2000 Rutgers Study – "ESOPs increase sales, employment, and sales/employee by about 2.3% to 2.4% per year over what would have been expected absent an ESOP. ESOP companies are also somewhat more likely to still be in business several years later."
  
• The 1986 NCEO Study – "The study found that ESOP companies had sales growth rates 3.4% per year higher and employment growth rates 3.8% per year higher in the post-ESOP period than would have been expected based on pre-ESOP performance."
  
• The New York and Washington Studies – "In both studies, employee ownership per se had little or no impact on corporate performance, but a substantial impact when combined with participative management."
  
• The GAO Study – "The GAO study found that ESOPs had no impact on profits, but that participatively managed employee ownership firms increased their productivity growth rate by 52% per year."
  

The page also addresses the following topics:

• The Impact of ESOPs on Employee Compensation – a study shows that ESOP employees are significantly better compensated. "In ESOP companies, the average corporate contribution per employee per year was between 9.6% and 10.8% of pay per year, depending on how it is measured. In non-ESOP companies, it was between 2.8% and 3.0%."
  
• Public Companies and Employee Ownership
  
• Broadly Granted Stock Options and Stock Prices
  
• Other Studies
  
• Broadly Granted Stock Options and Corporate Performance