When Your Friends Aren’t Your Friends

It would be easy for us to sit back and bask in the comfortable knowledge that the Congressional tax committees did not draft tax reform measures that negatively affect ESOPs.

Certainly, that is good news. But we can’t let that recent success cause us to remain ignorant of the fact there remain plenty of people who do not believe in the things that we believe—that ESOPs are good for our nation, our companies, and employees.

Sometimes that dislike for ESOPs can be harder to spot, because it is hidden under an apparent love for different forms of employee ownership.

A recent example: The Governor of New York signed a measure, which was passed by the New York State legislature, mandating that the State’s economic development activities encourage, support, and help create “employee-owned companies.”

That sounds like great news! Except that the details of the provision essentially rule out ESOPs, as we know them.

Specifically, the law says that state agencies should encourage trusts to hold company stock if both of the following are true:

• The trust holds more than 50 percent of the company’s stock.
• The employees elect the trustees.

This is a perfect example of the devil being in the details. Why?

I have visited nearly 800 ESOP companies, and I do not recall a single one that had employees elect the ESOP trustee or trustees.

In fact, I could make a legal argument that such an arrangement would constitute a violation of the law: The trustee must act in the best interest of the beneficiaries, and selecting that person requires a good deal of technical and specialized knowledge and expertise. Is the average person qualified to determine if a potential trustee is qualified? If not, the trust could be run by someone who—wittingly or unwittingly—does not act in the best interest of the plan participants.

And that is a violation of ERISA.