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The Employee Ownership Update

Loren Rodgers

December 15, 2011

(Loren Rodgers)

SEC Alleges Fraudulent Stock Valuation at Stiefel Labs

On December 12, the SEC sued Stiefel Laboratories and its then-CEO Charles Stiefel for defrauding plan participants and other shareholders of $110 million by purchasing shares from them at "severely undervalued prices." Stiefel Labs, which was privately held at the time of the purchases and is currently owned by GlaxoSmithKline, established an ERISA-qualified stock bonus plan in 1975. The SEC complaint alleges that the defendants failed to disclose material nonpublic information to the appraiser, including "higher equity valuations by five investment firms, offers to purchase the Company, an investment by one of the five investment firms at a much higher equity valuation, and that the Defendants were actively shopping the Company for sale to large pharmaceutical companies." The SEC's complaint (PDF) signals, in the words of Eric Bustillo, Director of the SEC's Miami Regional Office, that private companies are subject to federal securities laws, noting that Section 10(b) of the Securities Exchange Act of 1934 "protect[s] all shareholders regardless of whether they bought stock in the open market or earned shares through a company's stock plan." In a statement, GlaxoSmithKline denied the charges and said that it plans to "vigorously defend itself against the SEC complaint."

New Data Show Broad-Based Option Plans Decrease Employee Turnover

Three researchers at the Kenan-Flagler Business School at the University of North Carolina found that broad-based stock option plans in public companies reduce employee turnover, especially where industry returns are increasing. The study, "The Option to Quit: The Effect of Employer Stock Options on Turnover Intention" by Serdar Aldamatz, Paige Ouimet, and Ed Van Wesep, found that turnover over three years is lower in broad-based plans, even when controlling for comparison companies without these plans. The most dramatic effect is among companies in high-performing industries. Unlike their peers, firms with broad-based stock option plans do not realize higher turnover during periods of strong industry stock market performance because it is exactly at these times when such plans are most valuable. In industries with a 10% over-performance, for instance, broad-based options reduce turnover by 20%, relative to averages. There is a positive effect even in weaker performing industries, but it is small.

Employee Ownership in Southern Africa

Zimbabwe and South Africa are both actively pursuing employee ownership as a means of transferring ownership to traditionally marginalized groups. In early December, Zimbabwe's president Robert Mugabe launched the Schwepps Zimbabwe Limited employee ownership trust, which now owns 51% of the company on behalf of 700 employees. The government intends this transaction, the largest to date under the country's Indigenisation and Economic Empowerment Act, to serve as a model for future transactions. In South Africa, an ownership scheme matured, giving employees at Kumba Iron Ore an average payout of R576,045 (71,200 USD) per employee from a share ownership plan, described in a news video.

Penn Leadership Program for ESOP CEOs

The University of Pennsylvania and the Employee Ownership Foundation have announced the 2012 Leading in an Ownership Setting, a certificate program for chief executives of ESOP companies. Combining the insight of Penn's faculty and a unique opportunity to build in-depth relationshiops with other CEOs sharing similar challenges, past participant Stephen Sheppard describes the program as "Containing elements both conceptual and taken from real life, the content of this offering is eye-popping in both its depth and breadth." The dates, cost, and more information is in the program's online brochure (PDF).

Deadlines: ESOP Executive Compensation Survey and Board Nominations

The NCEO survey of executive compensation practices will be open until January 6 (an extension from December 16). ESOP companies can complete the online survey anonymously and will receive a pre-release summary of the results. In addition, people may nominate themselves for the NCEO's board of directors. More information is on the board candidates' resource page.

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