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The Employee Ownership Update

Loren Rodgers

April 15, 2013

(Loren Rodgers)

President's Budget Includes Repeal of ESOP Dividend Deduction

President Obama's proposed budget for the 2014 fiscal year would "eliminate section 404(k) ESOP dividend deduction for large C corporations," and calculates that the move would increase federal tax revenue by $407 million that fiscal year, rising to $722 million in 2023. The explanation of this proposal specifies that "large" C corporations would be those with $5 million or more in annual revenue. Companies smaller than that would still be allowed to deduct applicable dividends, although such companies represent an extremely small number of ESOP companies.

The administration states its main reason for the proposal is the worry that a concentration of employee assets in company stock creates risks for employees. Analysis by the NCEO suggests that the risks of concentration do not apply to the great majority of ESOP companies, which tend to provide diversified retirement plans in addition to their ESOPs.

Reacting to the proposal, Michael Keeling of the ESOP Association said, "The long-term implications would be awful for the future of a very successful policy of encouraging a more inclusive capital ownership structure in America that can address job sustainability and income inequality, if the policy reasons cited for the proposal by the Administration become the policy of our national government."

[Note: this article has been corrected. It originally described the expected revenue increase as $407 billion to $722 billion.]

FASB Indefinitely Defers Disclosures of Private Company Valuation Data

At its April 10 board meeting, the Financial Standards Advisory Board (FASB) voted to issue an exposure draft that, if approved, would indefinitely defer the adoption of disclosures of numeric values of valuation inputs for company stock in employee benefit plans. FASB's decision was based on concern that the disclosures would have exposed privately held companies' confidential information to the general public on the Department of Labor's Web site. If approved, the deferral will be in effect until the employee benefits community and the DOL resolve the issue. Such indefinite deferrals may last multiple years.

The original disclosure requirements, described in FASB's Accounting Standard Update 2011-4 on fair value, applied to plan years starting after December 15, 2011, and would have required a description of the specific valuation methods used and the specific rates applied. In other words, an ESOP company may have had to report, among other things, fair value, the EBITDA multiple used, and the size of discounts, such as the discount for the lack of marketability. The proposal is to retain the descriptions of the methods and the inputs, but to eliminate the requirement to quantify the inputs.

The disclosures would have been available to the public because employee benefit plans with 100 or more participants are subject to audit under the Employee Retirement Income Security Act (ERISA), and the audited financial statements are available on the DOL's Web site.

The NCEO, the Employee-Owned S Corporations of America (ESCA), and the ESOP Association argued in a joint letter to FASB that making such information broadly available would harm companies by exposing them to hostile takeovers and litigation.

The decision to indefinitely defer these ASU 2011-4 requirements follows an exposure draft process, as part of which a 30-day comment period is expected to begin at the end of April. Service providers and companies with comments should submit their comments.

Thanks to Becky Miller of McGladrey.

Share Your Favorite ESOP Communications Materials

The NCEO is revising its ESOP Communications Sourcebook. The most important part of this resource is the material we receive from ESOP companies. Please send us actual or redacted documents that you use to communicate about your ESOP, company financials, employee events, organizational culture, employee engagement, corporate governance, or other company information. We are looking for videos, PowerPoint presentations, brochures, FAQs, outlines of training programs, photographs, emails, games, posters, spreadsheets, or anything else you think might spark ideas in people at other companies. Send these materials to Corey Rosen at crosen@nceo.org.

GEO and NASPP Surveys on Equity Compensation Plans

The National Association of Stock Plan Professionals (NASPP) is offering its annual survey of design issues for domestic stock plans. The only way for companies to see the results of the survey is to complete the survey, which closes on April 19. Information on the survey is available on the NASPP Web site.

The Global Equity Organization (GEO) has opened a survey on equity compensation globally, covering plan features, administration, communication, employee satisfaction, and the regulatory environment. Companies who complete the survey by April 22 will receive the full results of the survey. Participants can learn more, register, and complete the survey on GEO's Web site for the survey.

Mondragon: Worker Cooperatives in a Difficult Economy

Writing in the Guardian, Giles Tremlett described the impact of the economic downtown on the world's largest worker cooperative, the Mondragon Cooperative Corporation (MCC). Headquartered in the Basque Country on the northern coast of Spain, Mondragon is Spain's seventh largest industrial group, with $20 billion in revenue and 84,000 employees worldwide. The MCC is the parent corporation for 111 businesses in sectors from manufacturing to consulting to retail.

While Spain's economy shrinks at a 1.9% annual rate and has unemployment of 26%, Mondragon has, so far, closed just one of its units, a 30-person cooperative that made equipment for the lumber industry. Those workers, and any others that their coops can no longer productively use, are redeployed to other coops within the MCC. Redeployment is one reason the coops claim to be more flexible than traditional business. Another, explains Emilio Cebrián, the social director at Mondragon's Eroski supermarket group, is that "When times are bad, we cut wage costs by deciding it among ourselves." Overall, average wages at Mondragon have dropped by 5%.

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