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The Employee Ownership Update

Corey Rosen

August 19, 2004

(Corey Rosen)

Mellon Study Says Companies Cutting Back Broad-Based Options

In a Mellon HRIS survey of 108 mostly public companies, 44% of which were technology companies and 19% life sciences companies, 49% of the respondents reported that they make options or similar awards available to most or all employees on an annual basis. Almost all (87%) the life sciences companies do this, followed by general industry (33%) and high technology (31%). Sixty-three percent of the companies have ESPPs, 9% have ESOPs (that figure is 20% for general industry companies), and 51% have 401(k) plans with company stock as one of the investments. Only 13% have no other equity vehicle in addition to their stock options or similar awards.

In response to proposed accounting rule changes, 45% of all companies and 67% of general industry companies would eliminate option eligibility for non-exempt employees. While non-managerial exempt employees would mostly still remain eligible, 40% of the companies say the amounts these employees would get would be much lower. Not surprisingly, executives will suffer no such slings and arrows, and even where option grants go down, companies report something else will take their place for people at executive levels, but not much at other levels. Similarly, companies generally say they will keep their ESPPs, but two-thirds of the companies say they will cut back the discount, the look-back period, or both. The study, "Responding to Mandatory Options Expensing," is available from Mellon by contacting Brett Harsen at harsen.b@mellon.com.

New Book Explores Democratic Capitalism

Ray Carey's new book, Democratic Capitalism: The Way to a World of Peace and Plenty, is a comprehensive look at the concept of capitalism, both in terms of how it is now practiced and how Carey thinks it must be reformed. Carey starts with a detailed and well-informed review of 18th and 19th century theories of economics, from Adam Smith to Karl Marx. His discussion of Adam Smith is especially trenchant, pointing out that Smith was one of the first proponents of what we would now call workplace involvement. Smith also was no fan of paying workers the least the market would bear. Carey lauds Marx for pointing to some of the right problems, but Carey likes the solutions of John Stuart Mill much more. Mill was probably the first major intellectual figure to argue vigorously for employee ownership as a systemic reform.

Unfortunately, Carey notes, Mills' ideas remained largely an economic footnote to what Carey calls "ultra-capitalism," the modern system of capitalism that focuses more on greed and excess than anything Smith, let along Mill or Marx, would find appealing. Carey does not want the government to solve the problem with regulation and redistribution, however. Instead, he proposes what he calls "democratic capitalism," a system based around various approaches to worker ownership, profit sharing, and employee involvement. Like Louis Kelso, he argues that capital should pay a high dividend rather than simply accumulate value. Unlike Kelso, who argued that the key to democratic capitalism was reform of the way growth is financed, Carey argues the key is for institutional investors to realize that democratic capitalism would be a far better solution for the beneficiaries of their investments.

Carey is now director of the Carey Center for Democratic Capitalism, created to promote these ideas. He is the former CEO of ADT, the largest home and business security systems company in the country (now a division of Tyco, whose business practices later became a notorious example of "ultra-capitalism"), where he implemented many of these ideas. The 540-page book is available at http://www.democratic-capitalism.com/.

IRS Issues Final Incentive Stock Option Plan Rules

The IRS has issued final regulations on incentive stock option plans. The proposed regulations were published last year. The new rules only make minor changes from the proposed regulations, including revisions to the maximum aggregate number of shares in an ISO plan, the substitution and assumption of ISOs in mergers and acquisitions, and the modification of awards. The text of the regulations can be found at here on the IRS's Web site.

University of Wisconsin Starts Executive Program in Employee Ownership Management

The University of Wisconsin at Madison has started a three-day program for managers and supervisors on managing an employee ownership company. Courses will focus on communications, team-based management, marketing employee ownership, how ESOPs work, and other topics. The program will be taught by a panel of ESOP experts and academics, including NCEO board co-chair Sid Scott of Woodward Communications. The cost is $1,895.

Court Dismisses Amsted Industries Claims

In Armstrong v Amsted Industries, Inc., No. 01 C 2963, MDL 1417 (U.S. Dist. Ct. ND Ill, 7/29/04), ESOP fiduciaries and company officers won an important victory concerning fiduciary obligations, changes in repurchase rules, and business acquisition decisions. Amsted, a large industrial company and a 100% ESOP, acquired Varlen, Inc., in 1999. In 2000, the market for Amsted products, as with other companies in the industry, declined sharply (the company has since recovered). Its stock price fell by over 50%. A record number of employees left the company in order to receive distributions at the most recent valuation, which did not yet reflect the decline in company fortunes. Amsted then modified its repurchase plan to call for quarterly, not annual, valuations and to provide a longer time period for repurchase than had been in effect. Some employees sued LaSalle Bank (the ESOP's independent fiduciary), the company, two of its officers, and the ESOP committee, saying that the acquisition was improperly valued and that the repurchase plan should have been modified earlier to prevent a drain on corporate assets.

The court granted summary judgment to the defendants. Regarding the company, its officers, and the ESOP committee, the court ruled that they were not acting in a fiduciary capacity with respect to the decision to purchase Varlen. The court decided that the decision to change the repurchase plan was reasonable, and its analysis of its repurchase obligation could not have foreseen the unusual pattern of departures that occurred in 2000. As for LaSalle, the court made an important ruling that considerable deference was owed to a respected and qualified independent trustee, whereas actions of an inside trustee, especially where there is a potential conflict of interest, would merit much more scrutiny. It also ruled that the Varlen acquisition was not a fiduciary matter, although it noted that LaSalle had nonetheless investigated the issue responsibly. Finally, it ruled LaSalle had acted prudently in its review of the valuation and the repurchase obligation.

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