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The Employee Ownership Update

Corey Rosen

October 29, 2002

(Corey Rosen)

United ESOP Trustees to Start Selling Some Shares

Trustees of United Airline's ESOP will start selling shares in the plan in order to provide some diversification in the face of a possible bankruptcy filing. Reports indicate up to 20% of the shares could be sold now, and perhaps more later. ESOPs are intended by law to invest primarily in employer securities. This rule, however, does not exempt ESOP trustees from fiduciary prudence requirements under ERISA. If the trustees have reason to believe that the stock will not be a sound investment, they are obligated to diversify. If United does declare Chapter 11 bankruptcy, the shares would become worthless, so a good argument can be made that an ESOP trustee, knowing this is a possibility, should diversify at least to some extent. The announcement represents a final act in what has veered between farce and tragedy at United's ESOP. Instituted with great expectations for creating a new labor-management relationship, the United ESOP only got off the ground briefly. Tied to much resented wage concessions, leaving out the flight attendants, and having a pre-specified end point (contributions to the plan were to cease in 2000), the plan's structure was flawed from the outset. Worse still, neither management nor labor was ever committed to using the plan to create an ownership culture. The union leadership that created the plan was replaced soon after it started, while the key management people in charge of labor relations issues never believed the ESOP was a good idea.

Southwest Airlines Option Plan Could Be Derailed By SEC Requirements

Meanwhile, a company that has used employee ownership effectively, Southwest Airlines, may be unable to continue to offer options to its employees. Southwest CFO Gary Kelly said an SEC proposal to require a shareholder vote on all option plans could make it impossible for Southwest to offer options as part of a collective bargaining process. Because the plans have to be approved by shareholders before being instituted, Southwest would need to offer and authorize a plan prior to collective bargaining, something that raises both practical and labor law issues. Southwest is about 10% owned by employees through a profit sharing plan and already offers options to pilots and mechanics; it is now talking with flight attendants about options. One possible out would be for the airline to get shareholder approval in advance for a number of shares that could, but would not have to be, used for option programs.

SEC Chair Wants Shareholders to Vote on Option Accounting

SEC Chair Harvey Pitt told the Council of Institutional Investors on September 23rd that he believes shareholders should be allowed to vote on whether companies should expense stock options. Current SEC rules allow companies to exclude shareholder proposals on this topic as part of "ordinary business" matters. However, the SEC staff recently created an exception to that when they ruled that such votes could be required for plans that only compensate executives or that result in material dilution. Pitt has directed the SEC's director of corporate finance to consider a proposal requiring companies to allow votes on this issue.

International Corporate Governance Network Urges Options Accounting and Reform

The International Corporate Governance Network, an organization of leading institutional investors, has agreed on a series of proposed corporate reforms that includes a call for companies to expense options, dole out options in smaller but more frequent packages (to avoid the need for repricing), and put repricings to a shareholder vote.

Pension Reform Appears Unlikely This Year

Supporters of pension reform are increasingly skeptical any bill will pass this year. Congress will reconvene a lame duck session after the elections, but 11 of the 13 appropriations bills, homeland security, and prescription drug benefit proposals are all likely to get priority over pension reform, leaving little time to act on what remains a controversial issue.

Author biography and other columns in this series

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