The Employee Ownership Update
March 5, 1996
Administration to Oppose Section 133 ChangesThe Budget Reconciliation Act passed by Congress contains a provision to eliminate section 133 of the Internal Revenue Code. Section 133 allows lenders to exclude 50% of the interest income they receive on loans to majority ESOPs passing through full voting rights.
The Administration vetoed the budget bill, of course, and negotiations have been going on ever since. Until now, however, the Administration has not taken a position on section 133. At a February 27th meeting of the Steelworker-sponsored Worker Ownership Institute, however, Labor Secretary Robert Reich announced that the Administration would oppose the change. While it is not clear what impact this will have if a budget agreement is reached, it augurs well for future efforts to reduce ESOP tax benefits, a process that would be made much harder if the Administration opposes them.
Reich Announces New Effort to Set Guidelines for Multi-Investor Leveraged BuyoutsOne of the trickiest issues for ESOPs has been how to value different kinds of investments in multi-investor transactions. If the ESOP borrows money to be repaid out of future earning, while other investors put in cash, should each get a dollar's worth of stock for each dollar pledged? That has been the Department of Labor's view, and it has received some support in the courts. Practitioners universally agree it is impractical, however, and has made leveraged ESOPs that needed equity investment much harder to do, although these transactions still occur.
At the Worker Ownership Institute meeting, Secretary Reich, in response to a question, agreed to direct the Department to develop guidelines for how these transactions could proceed. That was tried unsuccessfully in the 1980s, however, and many people are skeptical that it will be possible now either.
New Study by University Researchers Says IPOs by Employee-Friendly Companies Perform BetterA new study by Theresa Welbourne at Cornell and Alice Owens at Vanderbilt shows that initial public offerings by companies that offer stock and profit sharing to employees, provide worker training, and stress good work relations do much better than companies not practicing these "employee-friendly" approaches.
Five years after their IPOs, 60% of the companies were still in business as independent entities, but 87% of these with profit sharing and stock ownership were, while only 45% of those without these practices survived. Despite their better performance, the employee-friendly firms had market-to-book ratios lower than their stingier counterparts, indicating that Wall Street types are still skeptical that any of this makes much sense.