The Employee Ownership Update
February 1, 2011
New Data on ESOP Repurchase ObligationsA new NCEO survey of over 420 ESOP companies on how they handle their repurchase obligations found that the most commonly used method of funding current-year ESOP distributions is cash from company operations. Fifty-eight percent of respondents used cash from operations for funding distributions in the most recent plan year, and 43% exclusively used cash from operations. The next most common sources of repurchases were annual cash contributions to the ESOP (used by 30% of respondents) and cash in the ESOP from prior year contributions (used by 27%). Six percent used corporate sinking funds, and the other funding sources (corporate-owned life insurance, new ESOP debt, and purchases by management) were used by no more than 3% of respondents.
About three-quarters of the companies immediately or after some delay move shares bought from former employees back into the ESOP. Most companies make distributions in lump sums, followed closely by companies that pay in installments for larger balances and lump sums for smaller balances. Two-thirds of respondents giving a valid response said that their company's valuation firm considers repurchase obligation in appraising the company's stock, a dramatically higher percentage than in past surveys. Eighty-four percent of respondents said that they intend their ESOPs to be permanent.
A report on the survey will be available in the members-only area of this site later in February.
ESOP Company Boards Moving Toward Independent DirectorsOne of the more notable trends in ESOPs over the last several years has been the move to more outside, independent directors. According to a 2009 NCEO governance survey, the average board of directors has 5.6 members, of whom 61% are insiders, 27% are independent directors, and 12% are "affiliated directors." Twenty-six percent of boards are composed solely of insiders. Majority ESOP-owned companies are more likely to have independent directors. Companies in the 2009 survey were more likely to have independent directors than companies in the 2005 survey.
The median annual compensation for nonemployee directors is $10,000, excluding the 26% of companies that have uncompensated nonemployee directors. The vast majority of directors who are employees are not compensated specifically for their board service. Twenty-nine percent of companies provide a full pass-through of voting rights, and 17% have participants vote for some or all directors.
Survey results are available to NCEO members by contacting Loren Rodgers at firstname.lastname@example.org. The NCEO publishes a book on issues for board members, The ESOP Company Board Handbook. We can also direct members to other ESOP companies in their area who might have people interested in serving on boards and have a limited number of names of ESOP experts who also have an interest. Contact me at email@example.com for details.