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The Employee Ownership Update

Loren Rodgers

July 15, 2014

(Loren Rodgers)

Supreme Court Vacates Three Circuit Court Decisions, Showing Double-Edged Sword of Fifth Third Decision

The Supreme Court's June 25 ruling in Fifth Third v. Dudenhoeffer ended the presumption of prudence for fiduciaries of ESOPs, but its decisions to remand three related cases shows that its decision will have both pros and cons for ESOPs.

In Rinehart v. Akers, No. 13-830 (July 1, 2014) and Kopp v. Klein, 2014 No. 13-578 (July 1, 2014), the Supreme Court vacated and remanded two cases previously decided in favor of defendants (Lehman Brothers in the Second Circuit and Idearc in the Fifth Circuit). In both cases, the defendants had successfully asserted a presumption of prudence for holding and offering company stock in their retirement plans. Now that that presumption has been voided, lower courts will have to reconsider the cases.

In Amgen Inc. v. Harris, No. 13-888 (June 30, 2014), however, the Court vacated and remanded a case the fiduciaries had lost. The Ninth Circuit had ruled that the fiduciaries were not entitled to the presumption of prudence because the plan did not require employer stock as an option. It also held that statements made in SEC filings and expressly incorporated in summary plan descriptions (SPDs) are fiduciary acts that can give rise to ERISA liability. The plaintiffs had alleged that the fiduciaries provided misleading information to participants and the SEC and should have disclosed what they actually knew about threats to Amgen's stock price. The Fifth Third case made it more difficult for plaintiffs to successfully make such pleadings, and now they case will have to be redecided.

The standards created in Dudenhoeffer are difficult to apply to privately held companies, and its implications are unclear. While some writers expect an increase in litigation among private companies with ESOPs, the majority of lawyers with ESOP expertise suggest that Dudenhoeffer will make it more difficult for plaintiffs to prove lack of prudence. The NCEO will continue to release comments on the implications of the Dudenhoeffer decision, including the implications for inside ESOP trustees.

Survey Says 20% of Sampled Companies Grant Equity Awards to Nonmanagement Employees

The 2014 Meridian Compensation Partners Trends and Developments in Executive Compensation (PDF) finds that 20% of a sample of 123 large companies provide some form of equity compensation to at least some nonmanagement employees (the study was not more specific than that).

The authors state that "granting long-term performance awards below the management group (e.g., to all long-term incentive eligible employees) is not a common practice in part due to line-of-sight and a perceived inability for those participants to drive results." That sentiment is almost universal among executive compensation consultants despite the overwhelming research that employee engagement below the management level is a key, if not the key, driver of company success and that the "line of sight" problem is largely misleading and unsupported by evidence.

New York City Allocates $1.2 Million to Develop Worker Cooperatives

On June 19, New York City Council and Mayor Bill De Blasio approved a budget item that will provide $1.2 million to support training, with the goal of incubating 28 new worker cooperatives and supporting 20 existing cooperatives. The city expects the result to be 234 new jobs. The City Council appeal noted that "often times minimum- and low-wage jobs do not provide enough of an economic boost to provide upward mobility for many New Yorkers. Worker Cooperatives are designed to help build assets and wealth among low-income individuals and communities, and create entrepreneurs and community leaders."

Mayor De Blasio also declared June 21 "Worker Cooperative Day."

Research Finds Employees Value Company Stock Plans

A 2014 report by Fidelity Investments finds that 40% of polled employees say that a company stock plan is a "must-have" when considering a new job. The vast majority (86%) of workers 40 years old or younger say that would want a prospective employer to offer company stock, and 10% of respondents rank company stock plans as more important than health care and 401(k) plans. A majority of respondents say that company stock increases their company loyalty and encourages them to work harder (54% and 57%, respectively). Kevin Barry, executive vice president of stock plan services at Fidelity Investments, says the study's results indicate that "today's workers increasingly understand that a company stock plan is a great savings option to complement their traditional workplace savings plan."

Employee Ownership in Italy

At a recent ESOP Centre conference on employee ownership Tiziano Treu, a former Italian Employment Minister, said the center-right government of Matteo Renzi is looking for ways to stimulate more broad-based employee ownership in Italy. There are already a number of worker cooperatives, some quite large, such as Banco Popolare di Milano, but business and union attitudes towards employee ownership have been at best mixed. Unlike the U.S. and some European countries, relatively few closely held Italian companies are larger than 10 employees. Currently, about 4.5% of the Italian workforce is in some kind of employee ownership plan, up from 3% in 1990, in large part because companies traded stock for pay cuts. The Renzi government will be proposing legislation to encourage employee ownership as part of a privatization program.

New Edition of The SAIC Solution

One of the most inspiring and thought-provoking stories in employee ownership that of SAIC, one of the largest and most innovative employee-owned companies in the United States, and the Foundation for Enterprise Development has just released the second edition of the definitive book on SAIC, written by its founder, Robert Beyster. The new edition has new chapters on succession planning and governance, as well as reflections on events at SAIC since the first edition was published in 2007.

The new edition provides inspiration for those building or considering employee ownership, as well as the principles and concrete steps the company took to achieve its remarkable culture of decentralized entrepreneurialism. The new edition also, however, contains a warning. In his note to the second edition (PDF), Beyster writes that he added the chapter on governance to explore his belief that the company's "abandonment of the employee-ownership culture that we worked so hard to build over the years has had a terribly negative impact on the company, its people, and its bottom-line performance."

The book is available in bookstores and at, which also includes a video trailer.

Author biography and other columns in this series

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