When the oldest ESOP companies were ten years old at best in the mid-80s, or even 15 years old in the early 90s, the word “sustainability” was not in the lexicon of the ESOP community.

 

Beginning about four to five years ago at The ESOP Association’s New England Chapter meetings that were retreats for Board members, or CEOs of New England ESOP companies, several participants were surprised when other business leaders put this topic on the table—why are so many ESOPs terminated each year? Is there 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? 

 

At first observers of this discussion assumed that the discussion was all about handling repurchase obligations, and that having a cost effective, predicable methodology of handling repurchase obligations would dispose of the sustainability discussion.

 

But the discussion is about much more than repurchase issues.

 

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.

 

So, sustainability discussions have become very much succession planning discussions. How does the ESOP company current CEO and Board pick successors that will want to do what is necessary to keep the ESOP in place?

 

And here is another sustainability issue that comes up: How does a mature ESOP company, dedicated to remaining ESOP keep the ESOP spirit alive? The question is entwined with the issue of what is loosely called the “haves” and the “have-nots” in the ESOP company where the leverage was paid off five to ten years earlier. In such a situation, senior employees have enjoyed the magic of leverage and have significant account balances, whereas co-workers, perhaps doing the exact same job at the same pay, who joined the company after the ESOP debt was paid, have much fewer shares in their ESOP accounts, and thus are “lesser” owners.

 

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 Congressional labor committees.

 

Why do we want the answers? One, the leaders of ESOP companies and the employee owners should enjoy what they enjoy—if they like being ESOP, they should have the tactics and strategies to remain being an ESOP. Secondly, there is a large public policy issue involved that     will grow with time. The issue is how can the ESOP community maintain, or shall we say “sustain” special laws promoting ESOP creation and operation if the ESOP model of employee ownership is not sustainable, when one major justification used by the ESOP community is how much more competitive, productive, and wealth generating ESOPs are compared to non-ESOP companies?