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The Employee Ownership Update

Loren Rodgers

December 1, 2016

(Loren Rodgers)

UK to End "Shares for Rights" Plan

On November 23, the United Kingdom's chancellor, Philip Hammond, announced that the government would end the tax benefits associated with "employee shareholder status" (ESS) and would abolish the status itself at the next legislative opportunity. The ESS offered employees tax-free grants of employer shares that met certain conditions in exchange for the employee agreeing to give up specific shareholder rights. Although when the status was introduced in 2013 it was intended to encourage broad-based employee ownership, in practice it had primarily been used by highly compensated employees. The many other mechanisms to support employee ownership in the UK will remain in place.

Equity Compensation and the Trump Administration

Although the incoming Trump administration has not yet provided any specific guidance on its plan regarding equity compensation, some indications are available.

Bruce Brumberg wrote in his November 14 blog post that a review of the SEC filings from Trump companies clearly indicates the use of stock options, both for Trump himself and for other employees. More importantly, Brumberg observes that the Trump tax reform proposal would change ordinary income but not capital gains rates, though it is unclear whether he will work to eliminate the alternative minimum tax (AMT).

In a November 11 blog post, Jennifer Namazi at the National Association of Stock Plan Professionals notes that Trump's victory dramatically improved the prospects for some version of the Financial Choice Act, which failed to advance in the prior Congress. The act would undo parts of the Dodd-Frank act, such as the disclosure of CEO pay ratios.

The Trump Administration's Labor Department

[Update on December 9: The Trump transition team announced one of the candidates in our original story, Andrew Puzder, as the nominee for Secretary of Labor. See our commentary.] Although the incoming Trump administration has not yet announced a candidate to be Secretary of Labor, Politico reports that the three likely candidates are Rep. Lou Barletta (R-Pa.), Andrew Puzder (chief executive of CKE Restaurants), and Peter Kirsanow (an attorney who serves on the U.S. Commission on Civil Rights). The New York Times reports a single top candidate: Victoria A. Lipnic, an Equal Employment Opportunity commissioner and workforce policy counsel to the House Committee on Education and the Workforce.

The person running the Department of Labor transition team for Donald Trump is Steve Hart. Hart was an employee of the Department of Labor and several other executive agencies during the Reagan Administration. He joined the lobbying firm Williams & Jensen in 1984 and in 1999 became its chairman and CEO.

Selected Media Coverage of Employee Ownership

The Portland Press Herald ran a November 24 story titled More Maine construction companies are embracing employee ownership, citing three transactions this year: Wright-Ryan Construction in November, Warren Construction Group in July, and Landry/French Construction Co. in May. The article quoted Maine-based ESOP advisor Jeanne Pendergast of Spinnaker Trust, who noted that an ESOP is often an alternative to a sale to a third party: third-party buyers often "will not keep the company intact. They will take jobs out of the state, eliminate the name, etc. An ESOP is a way to keep the legacy and the culture of the company."

The Working Nation ran an October 27 article making the case for employee ownership. An excerpt, citing Christopher Mackin of Ownership Associates, follows:
"Thousands of baby boomers own businesses that they will soon want to exit," Mackin says. "If the resources are there—and they partly are— to persuade owners to 'sell internally' to their workers, those boomers will do more to attack income and wealth inequality than they could ever do acting as independent philanthropists."

It's a compelling, non-partisan proposition: Departing owners get on with retirement, businesses survive in place and employees are incentivized to keep to pay down their debt by running profitable businesses. Departing owners get market value for their assets, while ESOPs enable workers to save their own jobs. Wealth is not so much redistributed as it is "predistributed" by virtue of how these transactions are structured.
As cited in a November 22 article in the Idaho Statesman, the management of employee-owned WinCo issued a statement to employee-owners. Below are excerpts from the email, which came from Melissa Vandenberg, senior corporate counsel:
I know the election and the surprising results have caused all of us to have an emotional reaction — for some, it was positive, and for others, it was not. This election has been polarizing, and as many media outlets have stated, we are a nation-divided.

That said, we are not and cannot be a WinCo-divided...

Regardless of what is happening outside the walls of WinCo Foods, inside our stores all people are welcome and should be made to feel safe and valued.

Court Rules on Alleged Conflict Between SPD and Plan Documents

A district court in Illinois granted summary judgment in favor of Holden Industries, rejecting claims by a former ESOP participant, which were based on his reading of the summary plan description (SPD). The judge found that the SPD would not govern, even if it contradicted the plan document, and further found that the company had not violated the terms of the SPD. The judge also noted that the "decision to seek simplicity over exacting detail in the 2011 SPD does not amount to a breach of [the company's] fiduciary duty."

China: Employee Ownership Aids Performance of Publicly Traded Companies

A November 21 article in China Economic Net examines performance results for the first three quarters of 2016 and found that most public companies with employee stock plans saw an increase in profitability. Although the article uses the term "ESOP," Chinese ESOPs are more similar to U.S. stock purchase plans than to a U.S.-style ESOP. The article notes "Generally speaking, the companies who launch [an] ESOP are better in operating performance and more complete in information disclosure. At the same time, the launch of [an] ESOP also shows that the major shareholders, the board of directors, the senior executives and the board of supervisors of the company are confident of the company's current situation and its future development and have more energy for long." Of the 245 publicly traded companies with stock plans, 178 reported greater net profit growth than the prior year.

Free Online Course on Economic Democracy

The University of Edinburgh (Scotland) is offering an online course titled Economic Democracy: The Cooperative Alternative. The six-week self-paced course covers the basic economics of worker cooperatives, factors affecting viability, and policies that promote worker cooperatives.

Author biography and other columns in this series

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