This book was written to help ESOP companies think through their governance issues. An important part of the book is our latest survey on governance practices in ESOP companies. It provides details on board compensation and composition, board size and meetings, trustee types and compensation, policies and bylaws, insurance, and voting rights. Other chapters address governance at ESOP companies, including who does what, issues for boards and ESOP trustees, and the role of ESOP administrative committees; a legal analysis of ESOP participants and shareholder rights; the shareholder obligations of the ESOP trustee; the role of the ESOP fiduciary, including who is considered a fiduciary and common critical decisions for named fiduciaries; and how to create and sustain an effective ESOP company board. The final chapter discusses the 2014 fiduciary process agreement between the U.S. Department of Labor and GreatBanc Trust Company and the successor agreements based on it, which have served as important guidance for the ESOP community.
In the fifth edition (2022), this book has been extensively revised, with both major and minor changes to multiple chapters, from a new chapter on creating and sustaining effective ESOP company boards to the chapter on our 2021 ESOP corporate governance survey results.
Table of Contents
1. An Overview of ESOP Governance
2. ESOP Participants and Shareholder Rights
3. Shareholder Obligations of the ESOP Trustee
4. The Role of the ESOP Fiduciary
5. Creating and Sustaining an Effective ESOP Company Board
6. The 2021 ESOP Corporate Governance Survey
7. The DOL Fiduciary Process Agreements
About the Authors
About the NCEO
From Chapter 1, "An Overview of ESOP Governance"
ESOP committees are used in many ESOPs. They may be called other things, such as the ESOP administrative committee or the ESOP plan committee. They are not a statutorily defined entity. Instead, they are created in the plan document. They may be responsible for plan design, including recommending amendments to the plan to the board. In some cases, this could involve fiduciary issues, such as changing the plan in a way that reduces promised benefits to participants beyond the specific ESOP exceptions to ERISA. They can also make fiduciary decisions for the plan directly or by directing the plan’s trustee to make the decision. Alternatively, they can just be advisors to the fiduciaries. They often assume responsibility for administrative oversight of the plan (making sure that statements go out, that participants are paid, that allocations are properly made, etc.), although they rarely actually do the administration. Finally, they may communicate the plan to participants and even oversee the company’s employee involvement program, although more often companies have a separate non-fiduciary committee to do that (a practice we at the NCEO recommend because the people on a communication committee do not need to have the same level of technical expertise as those on the administration committee). For simplicity, this chapter defines an ESOP administrative committee as the group that oversees plan administration (and thus is the named plan administrator) and may or may not also have fiduciary responsibility to direct trustees. Note that many companies do not have these committees, in which case the legally defined plan committee is the company itself or an individual or group within the company. In the NCEO 2021 ESOP governance survey discussed in chapter 6, we found that the board itself most often serves the functions of an ESOP committee.
From Chapter 4, "The Role of the ESOP Fiduciary"
A minority of closely held ESOP companies still have an individual or committee act as fiduciary. Most often, an individual fiduciary is the CEO, CFO, or other officer of the company. In some cases, the seller to an ESOP is the fiduciary, or is on the fiduciary committee. This creates an obvious conflict of interest, however. An ESOP fiduciary is responsible for carrying out his or her duties with “an eye sole” to the interests of plan participants. A seller would have a hard time actively negotiating for the best deal possible for the ESOP, then running to the other side of the table to protect their own interests.
Many owners are reluctant to entrust fiduciary decisions to someone else, of course. That’s understandable, but so is the position of the courts when faced with a lawsuit from plan participants, most often over whether the ESOP overpaid for the shares the owner was selling or otherwise operated in a way that was more for the benefit of the owner than for the employees. It doesn’t matter if the plan ended up being good for employees too; it is the process that the court focuses on, not the results.
From Chapter 6, "The 2021 ESOP Corporate Governance Survey" (figures and tables omitted)
The survey asked about six types of pay for directors. Figure 6-5 details the percentage of respondent companies that offer each category. Most companies pay their directors a retainer and/or a fee per meeting, although some also pay equity or deferred compensation. Larger companies are more likely to offer equity compensation: 24% of companies with more than $50 million in revenue offer equity compensation to independent directors, compared with 6% of companies with $50 million or less in revenue.
Table 6-1 (see next page) shows percentiles of amounts paid for each of those components for each type of director. (Percentiles are not shown for categories with fewer than 10 respondents.)
From Chapter 7, "The DOL Fiduciary Process Agreements"
The GreatBanc Process Agreement formally applies only to GreatBanc. It is not a consent decree, injunction, or court order. Rather, it is the product of a constructive and collaborative effort engaged in by the DOL and GreatBanc. It is not a regulation and does not supersede, replace, or otherwise modify existing regulations, Field Assistance Bulletins, or other advice by the DOL.
At first glance, the GreatBanc Fiduciary Process Agreement may appear to impose new, onerous requirements on the ESOP trustee and valuation advisor when considering whether to approve an ESOP transaction. However, when viewed in the context of ERISA, the Proposed Regulation, case law, and established practice, there actually is very little in the GreatBanc Fiduciary Process Agreement that is new or more onerous than what an ESOP trustee was always expected to do in undertaking a prudent process in analyzing and approving a transaction in which the ESOP is purchasing or selling stock in the ESOP sponsor company.