The Employee Ownership Update
January 17, 2012
Iowa Governor Announces ESOP InitiativeSaying "Employee ownership is great for the Iowa communities," Governor Terry Branstad announced that promoting employee ownership would be one of his three top economic priorities. In his January 10, 2012, Condition of the State speech, the Republican governor announced three main tools to support employee ownership:
The proposal has broad bipartisan support and is expected to pass.
- Business owners would not have to pay state capital gains taxes for sales to ESOPs. That rate is 9% in Iowa.
- The Economic Development Authority (EDA) would offer technical assistance and legal advice to employee buyers and companies, including help to pay for feasibility assessments.
- The EDA would also work to make people more aware of ESOPs and how they work.
Shared Capitalism Companies Among the Best to Work ForThree researchers used an exceptional dataset to examine the impact of employee ownership and other group incentives on company practices and performance. In a working paper published by the National Bureau of Economic Research, Douglas Kruse, Joseph Blasi, and Richard Freeman conclude that "shared capitalist forms of pay are associated with high-trust supervision, participation in decisions, and information sharing, and with a variety of positive perceptions of company culture. At the firm level, shared reward forms of pay are associated with lower voluntary turnover and higher ROE [return on equity]. But it is the interaction between the mode of compensation and work practices and workplace culture that dominates the impact of shared capitalist pay on turnover and ROE." The data was collected by the Great Place to Work Institute, the organization that produces the "100 Best Companies to Work for in America," and includes extensive information on management practices, employee attitudes, and outcomes such as financial performance and turnover. The researchers define "shared capitalism" as employee stock ownership, profit and gain sharing, and broad-based stock options.
Mitt Romney and the ESOP at BainMitt Romney left Bain & Company in 1984 to lead the spinoff of the private equity company Bain Capital. The following year, Bain & Company set up a leveraged ESOP, which bought 30% of the company from its founding members for $200 million. Romney was not part of the ESOP and appears not to have had a role in its establishment. Bain Capital did, however, receive investments from Bain & Company founders, some of which came from the cash they received in the ESOP transaction. In the following years, Bain & Company's profitability and stock price suffered due to a number of factors, including the size of its debt and its involvement in a scandal involving alleged manipulation of stock prices. In 1990 Romney returned to Bain & Company as CEO, and this time he was intimately involved in the ESOP, leading negotiations that resulted in a dramatic restructuring of the company's ownership. According to Dirk Halacher's 2012 "The Governance of Professional Service Firms," "The founding group [of Bain & Company] abandoned their remaining 70% equity stake and returned about $100 million gained in the previous sale of the 30% stake. Under the new ownership structure, 40% of the equity was held by the ESOP and 60% held directly by 75 senior professionals."
Employee Ownership in the UKNick Clegg, the Deputy Prime Minister of the United Kingdom, called yesterday for what he called "responsible capitalism," observing that "Firms that have engaged employees, who own a chunk of their company, are just as dynamic, just as savvy, as their competitors. In fact they often perform better. The 1980s was the decade of share ownership. I want this to be the decade of employee share ownership." Clegg is the leader of the Liberal Democrats, which is part of the governing coalition along with the Conservative Party. Specifically, Clegg appears to be promoting tax incentives and a "right to request," which Rowena Mason described in an article in London's Telegraph as giving employees "an automatic opportunity to ask their employer for shares." The other two major parties appear to be advocating similar ideas, with the Conservative Party's David Cameron calling for a "genuinely inclusive and popular capitalism" and the Labor Party claiming that Clegg's proposals are based on their own earlier ideas.
Department of Labor Plans to Re-Propose Fiduciary RegulationsFil Williams, DOL senior employee benefits law specialist for the Employee Benefits Security Administration's Office of Regulations and Interpretations, said that the department still plans to re-propose regulations that would specify the conditions under which a stock appraiser would be deemed a plan fiduciary. Williams made the remarks on January 11 at the Los Angeles Benefits Conference.
Have You Voted?The NCEO's board election is underway. Over 300 votes have been cast, and members have until January 31. An email with instructions and a link to the ballot was sent on January 4, or you can call us if you would like to vote.
Author biography and other columns in this series