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The Employee Ownership Update

Loren Rodgers

January 15, 2014

(Loren Rodgers)

Comments on the Supreme Court's Review of the Presumption of Prudence

The Supreme Court has agreed to review the so-called presumption of prudence rule that has provided trustees of ESOPs and other defined contribution plans that are specifically designed to be invested in employer stock protection against lawsuits when stock prices in the plans drop dramatically. The presumption states that fiduciaries are presumed to be prudent in holding or offering employer stock unless there is reason to believe the company's survival is in doubt.

Since 1995, we have found 24 lawsuits that reached court where the presumption of prudence rule was involved and over 100 cases involving 401(k) plans. Notably, not one of the cases involved a closely held company.

The Court's ruling, expected by June, may be on narrow grounds that provide little guidance for future cases or may limit its analysis to public company scenarios. If the Supreme Court does not uphold the presumption, and does so on broad grounds that suggest ESOPs per se are less prudent than other retirement plans, that could have a major impact on ESOPs, public and private, particularly if fiduciaries believe they have to undertake substantially more detailed, time-consuming, and expensive analyses of any ESOP transaction. If it does not uphold the presumption, however, it may do so by laying out guidelines that make these plans viable but within narrower restraints, particularly in public companies.

The above discussion is excerpted from a longer comment on our Web site.

China Reform Program Will Allow Employee Ownership as Part of Partial Privatization of State-Owned Enterprises

China has announced that state-owned enterprises will be allowed to use employee ownership as part of a move to partial privatization of state-owned monopolies. Private investors would be allowed as well, but the state would retain control.

UK Companies with Broad-Based Ownership Plans Continue to Outpace Market

The stock price of companies traded on the UK's FTSE stock index with at least 3% of their shares owned by broad-based employee ownership plans grew 53% in 2013, compared to 21% for other FTSE-listed companies. Going back to 2002, the employee ownership companies have outperformed the market in 8 of 11 years, with an average annual difference of 14%. The index was created by a partnership between the London Stock Exchange and Capital Strategies.

New Global Report Finds 91,000 Worker Cooperatives

The world's leading organization of worker cooperatives, CICOPA (the International Organisation of Industrial, Artisanal and Service Producers' Cooperatives) identified over 91,000 worker cooperatives around the world, according to its year-end 2013 report. In addition, another 20,000 organizations have related organizational forms, such as social cooperatives and artisan's cooperatives. CICOPA defines social cooperatives as enterprises "specialised in the provision of social services or reintegration of disadvantaged and marginalised workers (disabled, long-term unemployed, former detainees, addicts, etc.)," and roughly half of the worker cooperatives are also social cooperatives, a form especially common in Italy.

Although the report is constrained by the difficulty in obtaining consistent data across countries, CICOPA conservatively estimates that these 111,000 organizations together employ around 4 million people. The great majority (83%) of organizations are in Europe—Italy and Spain together account for 77% of all enterprises. Together with the next nine countries (Argentina, Colombia, China, France, Poland, Brazil, Finland, Romania, and Japan), they account for 98% of the organizations. Cooperatives in South America tend to have large numbers of employees, so they account for 42% of people employed by cooperatives.

More Incentives for Employee Ownership Plans in Europe

Austria has increased the nontaxable maximum amount allowed for shares contributed by employers to employees under qualified employee ownership plans from 1,460 to 3,000 (roughly from $2000 to $4000).

Spain's Minister of Employment and Social Security, Fatima Banez, praised worker cooperatives at a recent international meeting of cooperatives and pledged increased government support for employees to form these companies. Worker cooperatives, she noted, have lost only 7% of their total employment during Spain's economic crisis, one that has seen unemployment exceed 25%.

The United Kingdom continues to expand its employee ownership incentives. Workers in companies controlled by an employee ownership trust could now receive an annual bonus of up to 3,600 ($6,000) per year. The monthly limit on Save as You Earn (SAYE) plans (plans similar to U.S. ESPPs, but with better tax treatment for employees) will be doubled from 250 to 500 ($400 to $800). The limit on free shares that can be awarded under a Share Incentive plan (a plan that contributes shares to employees) will go from 3,000 to 3,600 per. SAYE plans are particularly important in the U.K. Recent research by York University and Leeds University in conjunction with YBS Share Plans showed that 39 percent of SAYE participants save only through these plans, a number that rises to 58% for those making less than less than 20,000 ($33,000).

NCEO Board Elections

The election for the NCEO's board of directors is open through February 5. All members in good standing should have received an email with a link to the ballot on January 6. Contact Loren Rodgers (LRodgers@nceo.org) with questions.

Certificate Program for Non-Professional Fiduciaries

The Beyster Institute at UC San Diego's Rady School of Business is offering its second annual training program for ESOP fiduciaries. The program provides a certificate of completion and covers legal issues fiduciaries need to understand, standards for action, and in-depth discussion of specific decisions. More information about the four-day program is available online.

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