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The Employee Ownership Update

Corey Rosen

December 2, 2010

(Corey Rosen)

New Data on Employee Ownership in Large Public Companies

The NCEO has published its annual update of employee ownership in large public companies, the most detailed analysis of its kind. Of the companies included in the Standard & Poor's (S&P) 500 index of the largest U.S. companies and the S&P midcap 400, 199 have ESOPs or KSOPs (combined ESOP and 401(k) plans). One-third of these plans own more than 5% of the sponsoring company's shares. In addition, 17 401(k) plans own more than 5% of the shares in their employer. Altogether, 33% percent of the 900 companies have stand-alone 401(k) plans that include company stock.

164 of the companies have employee stock purchase plans (ESPPs), 29 provide options to most employees, and 11 have broad-based restricted stock plans (four of these also have option plans). While we are confident we have identified the large majority of ESOP, KSOP, and 401(k) plans owning over 5% of company stock in these companies, there is no way to be comprehensive about the individual equity plan lists. For this, we have looked at company Web sites to see if they indicate they have these kinds of plans and who is eligible. Not all companies have such information, however.

This list, which provides an analysis of employee ownership in the 900 largest publicly traded companies (the S&P 500 and the S&P midcap 400), was developed with support from the Heron Foundation and involved a complex task of checking multiple data sources.

Dividends and Restricted Stock

We get a lot of questions here about all sorts of technical issues, and occasionally one stumps not just us but even some of the experts we ask. In this case, the question was do companies have to pay dividends on unvested shares of restricted stock if the underlying stock is a dividend-paying class of stock? In some sources we found, the answer is "no," it's a matter of plan design. But after asking the people who really know about this, we found that the answer is (as it often is to more technical matters) "it depends." Mark Borges, a former NCEO board member and SEC staffer, and now a principal with Compensia, says that whether you have to pay dividends is a matter of state law and corporate bylaws or charters. So in California, for instance, a company can provide in its articles of incorporation that it will not pay dividends or provide voting rights on unvested shares.

New ISS Guidelines on Equity Plans

Institutional Shareowner Services (ISS), which provides widely followed advice to institutional investors on corporate governance matters, has issued its 2011 policy guidelines, including a new policy encouraging companies to hold annual say-on-pay votes for management. The Dodd-Frank Act of 2010 requires companies to have such votes every one, two, or three years. The frequency of the vote at each company will be determined by shareholders. In another recommendation prompted by forthcoming Dodd-Frank regulations, ISS will issue voting recommendations on golden parachute payments made in conjunction with corporate transactions on a case-by-case basis. Details on these and other provisions in the 2011 guidelines can be found at this link.

ESOPs and Kaizen

We have heard of more ESOP companies using "kaizen" management. It can be a great fit for employee ownership companies. For those of you who have been afraid to ask just what someone means by this at the latest cocktail party you attended, here is a brief explanation:

Kaizen is a continuous improvement process first developed in Japan but now used worldwide. One of its distinguishing features is that it involves all employees, a good fit for employee ownership companies. Kaizen has six core concepts:
  1. standardize an operation;
  2. measure the standardized operation (cycle times or quality standards in manufacturing; customer service processes for a retailer, etc.);
  3. gauge measurements against requirements for profits, productivity, or whatever other critical number is being used;
  4. get employees involved in finding innovative ways to improve performance;
  5. standardize the new, improved operations; and
  6. continue the cycle repeatedly.

A kaizen blitz is an intensive process over a few to several days to address a problem or seek a new opportunity.

In most companies, management defines the standards and employee teams then work to improve on them, often through small changes made continuously. In employee ownership companies, however, employee teams may themselves set the standards. A major part of the process is the mapping of the work process, often visually. Employees are usually asked first to brainstorm lots of ideas before the teams start to discuss them to agree on a new approach.

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