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EmployeeStockOwnershipPlans

ESOPs:An Alternative Form Of Ownership

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ESOPs In The USA: Background and History

• Employee ownership in the United States has a history that goes back to the time of the American revolution.– The first examples of employees sharing in the ownership

of companies and profits is recorded in the fishing industry when fisherman participated in the profits of the cod harvest off of Massachusetts. This practice was codified in the law of the time.

Employee Ownership in the US: A Brief Recent History

1920's 1950's 1974 TodayFirst Modern

Employee-Owners

Louis Kelso Russell Long and

ERISA12,000+ ESOPs

Millions of Employee-Owners

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What Is an ESOP?

Defined contribution retirement plan like profit-sharing with two significant differences:­ (1) Required to invest primarily in the stock of the sponsoring

company.­ (2) May borrow money backed by the credit of the company

(leveraged ESOP).

Can be used for stock transfers from existing shareholders or as a capital raising vehicle acquiring newly issued shares from the company.

A versatile tool used to accomplish a wide range of financial and employee relations objectives.

Why Do ESOPs Matter?

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Basic ESOP Benefits Non-Financial:

– Coordination of Employee-Shareholder Interests– Increased Motivation of Employees– Increased Job Satisfaction and Organizational Commitment– Increased Retirement Security for Employees– Greater Employment Stability

Financial:– Shareholder Liquidity with Tax Favored Funding– Tax Deductible Financing (in some countries)– Sellers’ Defer Tax on Gain (in some countries)– Tax Free Earnings (in some countries) – Wealth Building Potential for Low-Income Workers

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Research Results On ESOPs 4.4% increase in productivity following ESOP adoption (relative to the

increase among similar firms). This productivity rise associated with a 25% increase in capital stock, which is more than

2x the economy-wide annual productivity growth rate of 2.0%.

Total compensation was 8% higher and retirement benefits were 3% higher per year at ESOPs.

Significant wealth building potential for low-income workers. $600B in assets owned by ESOP employees (~$60,000 per employee-owner).

Exclusive entrepreneurial finance is available for ESOP deals.

Enterprises with ESOPs are 20% more likely to survive than industry counterparts.

Case Study #1 (Employee Stability) :

• Organically Grown Group LLC. (US)

– In 1999, a small Oregon based organic farming company, Organically Grown, converted to a subchapter S corporation owned primarily by growers, with a minority interest held by a small group of employees.

– Organically Grown grew to become the largest organic produce distributor in the Pacific Northwest. Currently supplies more than 200 natural and fine foods stores and restaurants located throughout western Oregon, Washington and Alaska, as well as retail and wholesale accounts in other western states and Canada.

– Experienced increase in “collective willingness to do what was necessary to maintain the company’s financial viability.”

• By 2011, Organically Grown’s cumulative turnover rate was 46.5% lower than in 2008.

Case Study #2 (Anti-Poverty): • Mondragon Corporation (Spain)

– Founded in 1956 in Mondragón (Basque County), a town with a population of 7,000 that was suffering the painful consequences of the aftermath of the Spanish Civil War: poverty, hunger, exile and tension.

– Implemented a Worker Cooperative Employee-Ownership scheme based on principles of Collaboration, Participation, Social Responsibility, and Innovation.

– Currently Mondragon is the 7th largest company in Spain in terms of asset turnover and provides employment for 83,869 people.

– The City of Mondragon now holds a population of 21,964 and generates $32B in annual revenues.

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Compare ESOP to Worker Cooperative

Ownership generally has two parts:

­ Ownership of equity – “If I own the company I get all the financial gain it produces.”

­ Ownership of Control – “If I own the company I get to tell everyone else what to do.”

ESOPs Generally Transfer Ownership of Equity.

Worker Cooperatives Generally Transfer Ownership of Control.

Cooperatives also usually cash out retirees at book value.

Case Study #3 (Worker Motivation and Productivity):

• Full Sail Brewing Company (US)

– Founded in 1987, Full Sail was one of the early microbreweries in the Pacific-Northwest.

– With only four employees, production for year one was a mere 287 barrels. However, after the adopting an ESOP system in July 1999 Full Sail began to produce over 100,000 barrels/yr.

– Based on sale volumes, Full Sail is the 9th largest craft Brewery in the United States.

Case Study #4 (Employee-Shareholder Coordination): • John-Lewis Partnership (UK)

– John-Lewis Partnership (JLP) is an employee-owned UK partnership which operates John Lewis department stores including Waitrose supermarket.

– JLP is owned by a trust on behalf of all its employees—known as partners—who hold influence in running the business and receive an equal share of annual profits.

– As a result of the profit-sharing and partnership structure, JLP has experienced greater organizational collaboration thus producing £105.4 M in retained profits for fiscal year 2011-2012, a 56% increase since 2000.

ESOP vs. Profit-Sharing• Unlike traditional ESOP models, profit-sharing structures reward

employees with dividend payments earned from increases in stock price. – Buy-and-hold (ESOP) vs. Cash-in-hand (Profit-Sharing)– Nevertheless, capital received from profit-sharing plans are often

reinvested back into the company to avoid taxation.

• Both plans are proven to increase employee retention, productivity, and motivation while encouraging greater organizational collaboration and equality.

• However, research indicates that profit-sharing is more effective, among younger employees because of the “instant gratification” factor.

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Does the ESOP Affect How the Company is Managed?

Not automatically, corporate responsibilities and positions do not change as a result of the ESOP.

The ESOP trustee represents the interests of the ESOP and its participants.

If there is a major corporate decision that requires the shareholders to vote, the trustee may discuss it with participants and ask for advice, but in the end, the trustee votes all shares.

In doing so, the trustee will decide what is in the best interest of the ESOP.

ESOP is a “stake” in the future value of the company – employees share in the value that is being created, but the governance of the company is not necessarily changed.

The ESOP’s Role in Management

Corporate Governance

Non-ESOP Shareholders Vote Directly

Shareholders Elect The Board Of Directors

Board of Directors

The Board of Directors is the elected Body

Responsible for the Direction of the

Company

OFFICERS MANAGE THE

COMPANY

ESOP TRUSTEE - Is Appointed by the Board of Directors - Is An ESOP Fiduciary - May be an Institution or Individuals - Is the Legal Owner of Shares - Votes Shares on All Matters (including Election of Directors) - May solicit voting instructions from Participants on major issues.

-ESOP Administration-Communications-Other Operational

Appoints Officers &

Determines Compensation

of Company Management

In order to Effectively OperateThe ESOP or Assist Communication, the Board May Make Use ofAdvisory Committees

The ESOP is Represented by

the Trustee

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What Is the Easiest Way To Get An Employee Ownership Deal Done?

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Serial Sales to ESOP Equity Builds as the Cycle Repeats

ESOP Sponsor

ESOP Trust Employees Build Equity Over Time.

Selling Shareholders Transfer OwnershipOver Time

Purchase SharesContributions,or Earnings

Company Contributes to ESOP from Annual Profits

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• Research in one field related to ownership doesn’t automatically pertain to other areas.

• There may be benefits when ownership is held for individuals through a trustee.

- What does this say about non-trustee driven ownership?

• What are your comments and questions about the entire presentation?

Conclusions, Questions and Comments:

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Special thanks to:

– Jason Law

for helping me put together this

presentation.

THANK YOU!

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Questions and Comments?

John Hoffmire, DirectorSaïd Global Entrepreneurship Network

andAssociate of the Oxford Centre for Mutual and

Employee-owned BusinessUniversity of Oxford

John.hoffmire@sbs.ox.ac.uk