The Employee Ownership ReportConcisely written for leaders in employee ownership companies and for service providers in the field, the NCEO's bimonthly newsletter, the Employee Ownership Report, is the most efficient way to stay informed about legal issues, current events, best practices, breaking research, management approaches, and communications ideas for employee ownership companies.
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Read a sample issue of the entire newsletter (September-October 2015).Sample Article from the May-June 2017 Issue:
ESOPs and Preferred-Status Certifications
By Loren Rodgers, NCEO Executive DirectorPreferred-status certifications, which designate businesses as minority-, woman-, or veteran-owned, or which apply to a disadvantaged area, can be a business advantage, especially for companies that want to bid on "set-aside" contracts. Based on the number of calls we are receiving, these certifications are also increasingly raising concerns for business that have ESOPs and those considering adopting them.
The relationship between preferred-status certification and ESOP ownership is complicated, partly because of the vast array of possible certifications: the list includes federal, state, and municipal governments, third-party certifiers, and even nonprofits and for-profits that want to contract with businesses owned by traditionally disadvantaged groups. Chicago's Minority Business Certification Program itself includes five separate certification types. Certifications in different areas do not necessarily have the same or even compatible standards.
Another challenge has been the understandable efforts by certifiers to find ways to ensure that ownership is genuine. They generally require that the company seeking certification must be 51% owned and also controlled by eligible individuals, and they have developed extensive tests to ensure that the ownership and control are not in name only. They may ask whether the company has issued stock options held by non-eligible individuals that could dilute the nominal owners, or they may seek documentation that the owners made a substantive contribution to the company in money or time in exchange for their ownership stakes. To document control, the certification agency may examine any agreements restricting the rights of shareholders and ask for the minutes of board meetings. The relevant law in Illinois, for example, also specifies that "stock held in trust" is one factor that may indicate that "ownership is not as stated."
As a result, imagine a hypothetical potential 100% ESOP-owned business in which the majority of employees would be women, the majority of shares would be in accounts held by women, the CEO is a woman, and the board is majority women. Depending on the certifier, such an enterprise may still fail to be certified as a women-owned business because the trust, as the sole owner, has no gender or personhood. Even if a woman who currently owns that business is assured ahead of time by the certification agency that it is "very likely" the company would continue to certified after the sale to an ESOP, she may not be willing to take that risk, especially if failure to retain the certification would jeopardize the business.
Thus, the difficult relationship between certification and ESOP ownership results not just from the rules themselves but from the uncertainty around their implementation.
Some companies have successfully addressed this challenge, and a thoughtful approach can make success more likely. With the generous support of the W.K. Kellogg Foundation and the benefit of the experience and expertise of NCEO members, the NCEO has documented many of the various certification standards, case studies of problems and solutions, and created a resource, ESOPs and Preferred- Status Certification (www.nceo.org/r/preferred) that will help both companies and certification agencies better manage the interaction between ESOPs and certification standards.
The NCEO is working to insert employee ownership into our emerging national conversation about where we are headed, and we ask for your help. We are looking for people who will share their stories with us or with the media. Drop me a line if you'd like to learn more at LRodgers@nceo.org.