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The Employee Ownership Update

Corey Rosen

February 1, 2006

(Corey Rosen)

Employee Ownership Companies Again Dominate Best 100 Companies List

More than half of the for-profit corporations on the Great Place to Work Institute's "100 Best Companies to Work For in America" list have broad-based employee ownership, a trait that frequently distinguishes the companies that appear on the San Francisco-based firm's annual list. Of the 85 companies that are not nonprofits or professional partnerships, 48 had some kind of employee ownership plan: 12 gave options to most or all employees in the last year, 43 had employee stock purchase plans (ESPPs), and 18 had ESOPs. Ten of the companies with broad-based option plans also had ESPPs and the other two had ESOPs. Eleven of the 18 ESOP companies had ESPPs as well. This does not count companies that have employer stock in their 401(k) plans. Six of the companies are majority employee owned (W.L. Gore & Associates, TD Industries, Publix Supermarkets, PCL Construction Enterprises, CH2M Hill, and Quad/Graphics).

The Great Place to Work Institute also provides consulting for companies about how to become great places to work. Companies on the list have consistently outperformed the larger market by a substantial margin. A list of all the companies appears in the NCEO's March/April newsletter.
IRS May Investigate "Designer" Stock in ESOPs

Department of the Treasury Acting Benefits Counsel W. Thomas Reeder told BNA that the IRS may investigate potentially abusive "designer" stock in ESOPs. Many ESOP companies use preferred stock or super common stock as a means to increase the amount of deductible dividends they can pay on ESOP shares, to create a capital structure that allows buyers of common stock to buy more shares for their investment (because the ESOP's shares carry additional rights), and/or provide the ESOP participants with a lower risk investment. While these structures can be and usually are entirely legitimate, the IRS apparently is concerned they can also be abused.

"Copycat" Employer Stock Cases Still Reach Mixed Conclusions

Since the implosion of Enron, more than 60 lawsuits have been filed against trustees, fiduciaries, boards, companies, plan committees, and corporate officers (all of whom may have overlapping roles) for violating ERISA by failing to protect participants in the company's 401(k) plan and/or ESOP from declines in company stock value. The suits variously allege that the plan should have diversified, that employees should not have been misled into investing in company stock, that critical information was withheld, or that boards failed to monitor plan fiduciaries. In a very useful analysis of these cases, Matt Chester and David Dodds find the courts have not come to consistent conclusions on any of these issues (Compensation & Benefits Review, December 2005). Few cases have actually been decided even at the trial court level, although a few more have been settled. Most decisions have been on motions to dismiss, meaning the courts have simply not ruled out the possibility of the issues being raised as worthy of a hearing. Courts have given mixed signals on whether the board has an affirmative duty to monitor fiduciaries and, if so, in what way and how much. Some courts lean toward seeing the only appropriate beneficiary of a suit as individuals covered by the class, while others see the plan itself as the logical beneficiary. Few, however, have given it careful analysis. Directed trustees have primarily been left off the hook, particularly in light of recent DOL guidance. On the tricky issues of whether disclosing non-public information in ways that ERISA may seem to require but securities laws do not (and that might, in any event, cause sharp drops in share price), courts have been all over the map. Given the likely appeal of some cases and the settlement of others, it may be some time before a clear, or at least clearer, course is set out for how to deal with employer stock in retirement plans. All of the suits, however, share common features. They all are in public companies, all involve sharp declines in share price, and all are either 401(k) plans or are ESOPs that are either combined with or operate alongside 401(k) plans or have employee deferral features. The typical ESOP-a plan in a closely held company with a separate 401(k) plan with diversified investments-has not been involved in these suits.

Annual Gathering of the Games Conference

The NCEO is again cosponsoring the National Gathering of Games Conference, to be held this year March 15-17 at the St. Louis Pavilion Hotel Downtown in St. Louis, MO. The Gathering of Games is the only national conference focused on open-book management and the Great Game of Business. Panels are structured primarily around companies that have implemented the program. The NCEO has been actively involved in the conference since its outset. For more information, registrations, etc. go to or call Kim Brown or Beth Miller at 1-800-386-2752.

The Gathering of the Games Conference immediately follows the NCEO's ESOP Feasbility: Beyond the Basics meeting in St. Louis (March 13-14).

New NCEO Board Members

The winners of the 2006 board elections are Rick Amering (Paychex), Vistor Aspengren (RSM McGladrey), Ed Carberry (Cornell University), Bill Carris (Carris Reels), Dan Marcue (Woodward Communications), John MIscione (Duff & Phelps), and Tim Regnitz (Crow Chizek). Our thanks and congratulations to the winners. Board members who have reached the end of their two-term limit are Nicky Rousseau (Quintiles), Sid Scott (Woodward Communications and the current board co-chair), and Bob Smiley (Benefit Capital). We very much appreciate their dedicated service and exceptional contributions.

Author biography and other columns in this series

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