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The Employee Ownership Update

Corey Rosen

May 15, 2009

(Corey Rosen)

ESOP Companies Show Strong Five-Year Stock Growth

The new NCEO survey on ESOP executive compensation shows that responding companies had impressive stock price growth between 2003 and 2008:
Share price increase 20% or more23%
Share price increase 10-19%31%
0% to 10% increase34%
Total responding: 310
There is no easy way to compare this to broader market indexes. First, the indexes are always calculated as averages. Here, we are looking at individual returns by category. The median for this group would be at least a 10% return; the mean (average) for the group can only be guessed at, but probably is about 20% or more higher. That's because in almost any market, the median performance of the companies in the index lags the average because values can only drop to zero but can rise to any number. For instance, Meb Faber in her book The Ivy Portfolio shows that between 1983 and 2007, only 25% of the stocks had a net positive return. The 2003-2008 period was also peculiar in that the market fell so sharply in 2008, ending about where it was in 2003. During that period, however, the Wilshire 5000, the largest market index, rose as fast just over 10% per year from bottom to its pre-mid-2008 peak.

Also, this sample, while representative of ESOPs in terms of size, industry, etc., is not a random sample—it consists of companies willing to answer the survey. Even with all these caveats, however, this performance is very impressive. I suspect that a much smaller number of non-ESOP companies in this time period have a 10% or greater average return.

The new study covers base, incentive, and equity compensation levels for six officer levels in 317 ESOP companies. For details on how to obtain the new ESOP Executive Compensation Database, go here.

What Stories Do Your Customers Tell About You?

At the NCEO/Beyster Institute's recent annual conference in Portland, Southwest President Emeritus Colleen Barrett told the attendees that airline executives can be reluctant to say what they do at a social gathering for fear of the stories people will want to tell about their terrible experiences. But not for Southwest, where people line up to tell their positive stories. Any of us who have flown Southwest and other airlines know just what she is talking about. Jim Moule from Torch Technologies told Ms. Barrett and the audience that for a while, he and another Torch executive were flying Southwest every week. His colleague had the safety warning down pat and was lip-synching it with the flight attendant, who then suggested he do it for everyone, which he did (flawlessly). But, she told him, "You aren't done." She gave him an apron and taught him how to pass out peanuts. He, and other passengers, were delighted with the whole turn of events.

It occurred to me that what kinds of stories customers are likely to tell about your company is a great measurement for how you are doing. Publix Supermarkets, the largest U.S. employee-owned company, is another employee-owned company that has legendary customer service. It even put out a book by James Carvin about the stories titled A Piece of the Pie: The Story of Customer Service at Publix that goes to all of its associates.

By the way, our annual conference was a great success. In a year in which conference attendance is typically down a third to a half, ours was only off 7% over what we would normally expect on the West Coast. Thanks to all who attended for making it a terrific meeting.

Backdate Update: Yes, Backdating Really Did Cause Significant Shareholder Damage

The stock options backdating scandal may seem like a long-forgotten, if sordid, chapter in executive pay, even if some prominent commentators argued the whole thing was silly and should just be ignored. Litigation efforts against the 150-some companies accused of backdating largely fizzled except for a few prominent criminal, class-action, and shareholder derivative cases, some of which are still in litigation. About 20 private litigation cases have settled or been decided.

But in a new paper, Gennaro Bernile and Gregg Jarrel ("The Impact of the Options Backdating Scandal on Shareholders," Gennaro Bernile, Gregg A. Jarrell, Journal of Accounting and Economics, 2009, vol. 47, issue 1-2, pages 2-26) find that backdating caused major economic losses for shareholders. Judgments in the settled cases, for instance, have averaged 1.5% of pre-scandal market capitalization in class action suits and .23% in shareholder derivative suits (a very difficult kind of suit to win).

Looking at the days around the announcement of the backdating problem at a company, stock prices dropped seven percent below the market-adjusted expected price, and stayed that way for several weeks afterwards. Looking over a one-year period after the Wall Street Journal story opened the backdating controversy, normalized returns for a portfolio of scandal-tainted companies dropped between 15% and 20%, depending on what comparison benchmarks are used.

Ownership Thinking Meeting

The NCEO is cosponsoring Ownership Thinking's third annual conference, "Initiating, Improving, and Sustaining Ownership Thinking," on September 17-18, in the Denver area. I will be speaking at this event, along with many practitioners of ownership thinking approaches, which focus on sharing ownership widely, broad-based incentive plans, open-book management, and employee involvement.

Topics include broad-based equity plans, creating a board of advisors, incentive plans, motivation models, non-financial goal-setting, financial management, and more. Brad Hams, an NCEO board member and frequent speaker at our meetings, leads Ownership Thinking.

For details, visit or call 303-984-1434 for information and to register.

Author biography and other columns in this series

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