This book was written to help ESOP companies think through their governance issues. An important part of the book is a new 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 ESOP governance generally, ESOP participants and shareholder rights, shareholder obligations of the trustee, the role of the ESOP fiduciary and of the board, and the DOL fiduciary process agreement.
The fourth edition of this book is a major revision, with various chapters added, removed, or drastically revised. Of particular note are the new chapters on the NCEO's 2016 corporate governance survey and on the fiduciary process agreement between the DOL and GreatBanc Trust.
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. The Role of the Board in ESOP Companies
6. The 2016 ESOP Corporate Governance Survey
7. The DOL Fiduciary Process Agreement
About the Authors
About the NCEO
From Chapter 1, "An Overview of ESOP Governance" (footnotes omitted)
An ESOP administrative committee, also sometimes called a plan committee or ESOP committee, may be appointed by the board of directors to oversee day-to-day operations of the plan. These duties can entail fiduciary obligations. In what follows, the term "ESOP administrative committee" is used for any committee performing these functions. While all ESOPs must have a trustee and someone to administer the plan, there is no legal requirement that there be an ESOP administrative committee. Plan documents should specify that there be such a committee or, if not, who will perform these functions, most commonly the board.
ESOP administrative committees 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 often communicate the plan to participants and even oversee the company's employee involvement program, although that function is more often assigned to a separate ESOP communications committee that has no fiduciary obligation. Each of these areas is discussed separately below.
From Chapter 4, "The Role of the ESOP Fiduciary" (footnotes omitted)
One of the most complicated and difficult issues faced by fiduciaries is how to respond to offers either to buy the company or to purchase some of the shares back from the ESOP. The second case is simpler. Generally, ERISA indicates trustees should be very cautious when the company or another owner buys shares out of the ESOP, although the same exemption that allows the ESOP to buy shares from a party-in-interest also allows the ESOP to sell them. These transactions raise concerns about the intentions of the parties and often highlight significant conflicts of interest. Most fundamentally, they raise a concern about the reason behind the plan. Was it really meant to be a "permanent" benefit for employees? Was it really meant to be for the primary benefit of employees? If not, the plan could be deemed to violate ERISA.
Fiduciaries normally should not sell, therefore, unless the price they are offered is at a substantial premium over the ESOP value, or the company is in difficulty and the offer is genuinely a better opportunity for employees than continuing to hold company stock. In either scenario, the fiduciaries would have to present a very compelling argument about why this was better for participants than continuing to stay invested in employer stock.
From Chapter 6, "The 2016 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 over $50 million in revenue offer equity compensation to independent directors, compared with 6% of companies with $50 million or less in revenue.
Total compensation amounts are calculated by summing any and all categories of pay for each type of director (table 6-1). This computation includes respondents whose answer was zero, but it excludes respondents who did not provide an answer. It is possible that respondents who did not provide answers intended to indicate that the compensation amount is zero, but this analysis errs on the side of caution by excluding them. Amounts reported for per-meeting fees are multiplied by the number of meetings, where reported.