Know the Game Plan: Execute It. Win!

ESOP Association President J. Michael Keeling

Note: Following are remarks ESOP Association President J. Michael Keeling delivered at the Association’s 2011 Las Vegas Conference and Trade Show held at Caesars Palace in Las Vegas, NV on November 3 – 4, 2011.

   “More productive, more profitable, more sustainable, providing locally-controlled jobs.”

Remember these words. These words need to be our ESOP community’s message to decision makers and thought leaders during these challenging political times.

There is ample, overwhelming evidence that in the vast majority of cases, the vast majority of mainstream, main street, private ESOP companies are: “More productive, more profitable, more sustainable, providing locally-controlled jobs.”

   Now, let me review issues facing your ESOP company, your employee owners, and for some of you, your ESOP clients.

Before I do, let me repeat what I have said to 15 of our 18 ESOP Association Chapters since late August: Everything I say has been said on our blog, on our Facebook page, on our LinkedIn page, and in our newsletter. If you prefer not to listen, please read the blog.  If something develops at 9 AM in the morning impacting, or potentially impacting ESOPs and employee owners, we report it and opine on it by 10:30 AM.

Our number one challenge this year has been to defeat, and/or to alter the Department of Labor’s October 22, 2010 proposal that appraisers of your ESOP stock be ERISA fiduciaries. In fact it was here, at the 20th Las Vegas Conference and Trade Show, that our campaign to stop the DOL proposal began.

We’ve made progress, and I do add that many last year felt that we, the ESOP community, would not be able to effectively stand against the DOL proposal. They were wrong; but the campaign is not over. DOL will re-propose the regulation in early 2012. Let me say that some claim the DOL will never re-propose the regulation; others say it will be re-proposed almost identical to its original provision that ESOP appraisers be ERISA fiduciaries.

I say why do we care what the future is with regard to what DOL may or may not do? Let us prepare for the worst. Let us continue to be strong in our opposition to the original proposal until we see a new proposal with a different approach. Why take a chance and let our guard down?

There is still a minority in our community that wonder why we do care. Their view is that the DOL proposal would only be a pain in your-know-where for appraisers, not the ESOP companies that have to retain appraisers each year.

Let me be clear: If your appraiser is an ERISA fiduciary your company will be a sitting duck for lawsuits motivated by former disgruntled employees teaming up with local plaintiff law firms.

I’ll explain. In my 30 some odd years working around ESOP companies, I’ve seen that the most common reason a private ESOP company is sued is due to a former senior executive who has been asked to leave the company seeking revenge. In every town and city in America, in Marion, IN, Salina, KS, Waco, TX, and so on, there are local attorneys who are promoting their services on cable and local TV. Now don’t get me wrong, I’m an attorney by training and this is not attorney bashing, just telling you what you all know — in today’s society companies are being sued often, and the attorneys’ bringing the lawsuits are always looking for new reasons to do so.

So, I can predict that if your ESOP company appraiser is an ERISA fiduciary, that lawyer responding to a former disgruntled employee will go through the litany of potential claims — age, sex, religion, etc., and if the DOL proposal becomes final, saying, “Ah, have you ever disagreed with the valuation?” The aggrieved former employee will probably say, “You betcha.” And the lawyer will say, “We have a lawsuit.”

Now, ESOP companies usually win lawsuits; but the average ESOP private company does not have the time, the resources, or the money to go through pre-trial motions, depositions, etc., and will likely settle for $50,000 to $250,000; a good payday for plaintiff lawyers on main street USA.

So, we need to stop the DOL proposal.

Here is a concern I have. The proposed DOL rule also impacts 401(k) plans and IRAs. Now, k plans and IRAs are much bigger in our economy than ESOPs. Loosely, I would call it the Wall Street crowd that is involved with the trillions and trillions of dollars involved with k plans and IRAs.  And while it took the Wall Street world a little longer than the lean and mean ESOP community to realize the threat the DOL proposal could mean to their k plans, their IRAs, and their k and IRA customers, once galvanized, candidly, their footprint is bigger than ours.

We have to remain vocal as some think the re-proposed DOL proposal will take care of the k and IRA concerns, but continue to harm ESOPs.

And as a side bar, I know many ESOP advocates have written to their members of Congress about the DOL proposal’s potential negative impact on ESOPs, but have received letters back mentioning k plans and IRAs, but nothing about ESOPs. I did a column in the ESOP Report that should you get such a letter, respectfully, but with clarity, write, call, email again noting that you appreciate hearing about the k and IRA issues, but you inquired about the ESOP issues in the DOL proposal.

Moving this report to the legislative sector, there is a bill pending in the U.S. Senate that would stop the DOL proposal dead in its tracks.

On June 20th of this year, Senator Kelly Ayotte of New Hampshire introduced S. 1232, which would amend ERISA Title I with clear cut language that the law excludes making appraisers of ESOPs fiduciaries.

The story of how Senator Ayotte, elected in the fall of 2010, took the bold step of making sure ESOPs are protected in law from this disturbing DOL proposal is a wonderful example of how true grassroots advocacy by ESOP companies can make the difference in making sure ESOP law remains supportive of your ESOP.

Here is the story: I was driving down the New York Thruway in a thunderstorm, and the blue tooth rang on my smart phone. I answered, and it was a staff person with Senator Ayotte who said the Senator was going to introduce a bill to stop the negative ESOP proposal put forth by DOL.

Let me assure you at that point I had never met Senator Ayotte, nor the staff person who called me.

Prior to that moment, I had never talked to anyone in the Senator’s office.

The ESOP Association plays by the rules, and a few weeks after that call and the introduction of S. 1232, I signed up for a dinner with Senator Ayotte to support her re-election.

At the dinner, I went up to Senator Ayotte and introduced myself as President of The ESOP Association.

She, without hesitation said to me, “Yes, I visited with my New Hampshire ESOP companies and they made clear to me how harmful that DOL proposal would be to their companies, and I decided not to let that happen.”

What is the message? It’s not some hired gun in Washington, D.C. that is going to make sure Congress, nor a Federal agency, doesn’t harm your ESOP, our ESOP cause — in fact if I had walked into the Senator’s office prior to the advocacy work of our New Hampshire ESOP companies, she would probably have had me arrested by the Capitol Hill police. It’s you, and you, and you, and your employees who will save ESOPs from misguided ESOP cynics in Washington, D.C. who think ESOP tax laws are rip-offs.

And she has been joined by other powerful Senators, such as the leader of the Senate Republicans, Senator McConnell of Kentucky and Senator Blunt of Missouri to name two.

But let us continue on the legislative discussion.

As I travel around our nation — I have visited 15 of the Association’s 18 Chapters since the last week of August — I hear over and over —- “Oh, what about tax reform? Congress is going to take away ESOP tax benefits.  Congress will tax S ESOPs. What can we do?  How can we stop tax reform?”

Folks, the ESOP community is not going to stop tax reform.  President Obama is for tax reform.  The Republicans running for President are for tax reform.  Democrats and Republican in Congress are for tax reform. The academics are for tax reform.  The think tanks, left and right, are for tax reform.


But do not fear tax reform.  Have a game plan for tax reform.  Execute the game plan. And the game plan can be summed up with the true adage, “The best defense is a good offense.”

I don’t know how many of you watched the Cowboys-Eagles game last Sunday night, but after the Eagles scored two touchdowns, I said to myself, “Gosh, the Cowboys need to hold onto the ball; they need to generate some offense to keep the Eagles off the field.” Well for those who watched, you know that for the Cowboys it was three and out, and the Eagles just kept getting the ball back to score until it seemed they were tired of scoring at will.

Let me explain why a good offense is our best defense when Congress does tax reform. Let me say I spell out what I am about to say in the September 2011 ESOP Report.

How does Congress, or better the House Ways and Means Committee, the House tax committee, which under our Constitution has to originate all tax bills, decide what to put in a tax bill?

The decision is not what you see on TV, or in an 8th grade civics book. A small group of men and women who serve on the Ways and Means Committee meet in a private session behind closed doors.  They often are just the members of the party in control of the Committee — currently the Republicans.

When they sit down, they’re often given summary sheets of what the Chair, at this time Congressman Dave Camp of Michigan, wants in the big tax bill, in our case a big tax reform bill.  Sometimes, the Chair provides options on the summary sheets; sometimes he says the sheets represent his proposed bill.

Before he has the staff pass out the sheets, he has reviewed all possible options with the staff, who are experts in tax law.

Now the chances are very high that on those sheets, say page 28, or page 59, or 109, there will be listed ESOP tax benefits as possible items to take out of the tax code in order to use the “new” revenue to lower Federal tax rates, the announced goal of tax reform.

If a member of the Committee, in that closed meeting, does not raise her or his hand saying, “I don’t want those anti-ESOP provisions in this bill,” then the anti-ESOP provisions will stay in the bill, will be voted on by the full Committee, with the Chair winning what came from the closed meeting.  But if someone raises her or his hand, and says, “I don’t want to see those ESOP provisions in this bill,” and three or four other members, not knowing the details but knowing they have publicly taken a position with their ESOP constituents that indicates support of ESOPs, say “I agree with Congressperson X,” then the provision will be dropped, and will not be included in the bill presented for a public vote in the Committee.

Now, even if only one party is in the closed room, the Chair will usually take the same sheets and ask the top member of the minority party if his people have any problems with what is in the bill. On minor provisions, if that top minority member says some of his people don’t like the ESOP provisions, they will be dropped.

I can tell you that over the years I have stood outside the closed room and have had a member who was in the closed room come out and say, “I tried to help your cause, but no one joined me.” And I have found out after some digging that member said nothing about the cause I was interested in.

So, how do we, ESOP advocates, get someone to say, “I don’t support the negative ESOP proposals,” and have others chime in with verbal support of that position?

We do it by having a good offense, that, prior to the small group of members sitting down in the closed room going over staff recommendations, has motivated members to publicly take a stand for ESOPs, for ESOP companies in their districts, by openly supporting legislation to expand ESOPs in America, to make operating an ESOP more attractive in America.

The specific tactic is to have a pro-ESOP bill introduced BEFORE the tax reform legislative process begins.  And it’s to have many members of Congress co-sponsor that pro-ESOP bill BEFORE the tax reform legislative process begins.

This is why there are these effort to have more members of Congress sponsor H.R. 1244 in the House and S. 1512 in the Senate.

We are making good progress with having men and women of Congress take the pro-ESOP stance by co-sponsoring H.R. 1244 and S. 1512. The bills are endorsed by both our Association and the Employee-Owned S Corporations of America, and both have members working directly, personally, with their members of Congress to sign up supporters.

As of today, 56 members of the House are sponsoring H.R. 1244. This House bill was introduced last March. The record number of House members co-sponsoring a pro-ESOP bill was 123 in 1993. Our goal should be to reach 100 plus by the end of 2012.  More important, 15 members of the Congressional Committee that will develop the tax reform bill, be it in 2012, 2013, or 2014, the House Ways and Means Committee, are supporting H.R. 1244. We need a solid two thirds of the members of Ways and Means to be supporters to protect ESOP law in tax reform, to enhance the possibility of one, two, three of those members holding their hands up to say do not hurt ESOPs.

And, by the way, if we could have that display of support for H.R. 1244, we might defy conventional wisdom and have pro-ESOP tax incentives added to the tax reform bill, such as permitting owners of S stock to utilize IRC 1042 like owners of C stock have done since 1984.

Now the Senate bill, S. 1512, was not introduced until this past September, but already there are ten Senators on board, a good mix of Republicans and Democrats, including three members of the Senate tax committee, Finance. We need 15 supporters on that Committee to win.

I know many of you, probably the overwhelming majority of you who hear me say these things think, “So what, Congress is dysfunctional and full of baloney.”

Let me be a contrarian — with regard to smaller public policy issues, which, whether we like it or not, ESOP policy fits into this category.

While it may be true that on big issues the gridlock and petty posturing in D.C. is super annoying, on small issues the process of legislation still works as it always has — bi-partisan support is doable, and essential.

Decisions on most issues in Congress, with input from the Executive Branch, are like most decisions made by small groups, defined as ten to 25 members of Congress. These people serve on the same committee or subcommittee. They get to know one another. They know about their colleagues’ family, sports likes and dislikes, they talk about the  weather, travel, and the trials and tribulations of life, such as being in a traffic jam trying to get to work, that we all do with our co-workers.

Think of your own co-workers. I doubt you really love all of your co-workers; or really agree with everything they believe in. But you work together; you accomplish mutual tasks; you are human beings and thus do not demonize your co-workers.

So on ESOP issues there is still reason to educate and persuade your members of Congress to be pro-ESOP, be it in supporting pro-ESOP legislation, or defending ESOPs in the tax reform process.

I admit our national mood is different, and faith in our democracy and in our Federal government wanes.

There are two developments in the past decade that are making our government less functional than in the 20th Century.

One is the 24-7 news networks pandering to those who have either the right wing view, or the left wing view. Unlike the 20th Century news outlets that were no more than three TV networks, and thus tried to be balanced in order to obtain ad revenue, now a cable news network can get enough ad money by proving it reaches all the conservatives, or it reaches all the liberals. In turn, those who can’t stand the Democrats, listen to good things about Republicans. And those who can’t stand Republican values listen only to good things about Democrats.

In the process, the metric becomes, “Who will win the next election?”

For example, the day Colonel Gadhafi fled Tripoli one network was not focused on the fact there were thousands of tons of mustard gas that his regime controlled, thousands of shoulder held rockets that are perfect to shoot down commercial airliners. What was this TV network focused on? It kept saying that after the commercial break its panel of top advisors of political experts was going to discuss whether this overthrow would help President Obama get re-elected?  My thought was, “Who cares? What about the mustard gas, the rockets, and the influence of the jihadists in Libya?”

In other words, these elected officials, who want to go on these cable news shows want to show that he or she is “solid” with the hard core group he or she belongs to. So, on the big issues, like debt, taxes, spending, they cannot budge after yelling about the other view on their favorite cable network.

Another development that has made compromise on the big issues near impossible is social media.

I grew up in East Texas, and it was the Old South.  The view to impeach Chief Justice Warren was strong due to his leading the Supreme Court to declare a person with dark skin could go to school with a blue-eyed, white skinned person.  Many thought former President Eisenhower was a Communist, and former President Johnson had orchestrated the murder of at least eight political opponents.

But these extreme views pretty much stayed in East Texas, and those in East Texas who had these views didn’t connect with someone in Maine, Minnesota, Montana, and so on who might think the same way.

Today, when someone posts on her or his Facebook page, or similar social network, that President Obama is a Communist-Muslim, which of course is a huge contradiction, no one can be both, there are people in all 50 states that read this, and are likely to believe it.

So the never ending 24-7 cable news pandering to those with set views, left or right, and social media linking conspiracy theorists, makes it look as if the nation is just about extremes and will never come together.

My son played soccer as a youth — he was a good soccer player. For a few years, his coach was a true Italian. I don’t mean a second or third generation Italian, but a real Italian who was in America working for the World Bank.

When things weren’t going well for the team, or just so-so, he would often say in exasperation — “I am so ‘foostrated;’ I am so ‘foostrated.’”

Well, I am foostrated.

The President goes all over the nation touting a “jobs” bill to get our economy back on track, putting more Americans back to work. Most people say, “Didn’t we have a ‘jobs’ bill in 2009?”

Meanwhile, the leader of the Republicans, Speaker of the House John Boehner, says we need to cut the C corporate tax rate and that will create jobs.  Today, most main street businesses are not C corporations and are pass-through organizations. Cutting the C corporate rate might help the big multi-national U.S. corporations, but not main street businesses like in this ballroom today.

Now, don’t get me wrong. I’m not anti-big business. Many of the ESOP companies in this room rely on big business as the major purchasers of their goods and services. Nearly 50% of Americans work for big business.

But I am foostrated because neither the leader of the Democrats, nor the Republicans, realizes this nation has a proven jobs policy. It is modest. It could be bigger, but it does in the vast majority of instances, create jobs in companies that are more productive, more profitable, more sustainable, and providing locally-controlled jobs.

That’s right — our national policy to promote employee ownership through the ESOP model is the proven jobs policy.

I suspect ESOP advocates are like me and are foostrated when national leaders never mention ESOPs as a successful jobs policy.

Now I know there are many articles and so-called “experts” that blast ESOPs as flim-flam. A few years back I reviewed these anti-ESOP articles, and discovered nearly all, if not all in recent years, were written by lawyers for law journals, or law students for law school publications. None were written by qualified social scientists like we had speak to us yesterday as Kelso Fellows. It’s foostrating to see law judges quote these non-qualified lawyers acting like social scientists, when the work by social scientists proves overwhelmingly most private ESOP companies are more productive, more profitable, and more sustainable, providing locally-controlled jobs.

What do we do? We look in the mirror, and we don’t point fingers blaming “others.” It’s in our hands to implant the true message with our national leaders that ESOP policy is a good jobs policy creating companies that are more productive, more profitable, more sustainable, and providing locally- controlled jobs.

And I have proof that what I just said is true. We can make the difference, as our ESOP advocates in New England have done with the Senator Olympia Snowe, the senior Senator from Maine. Please see the message Senator Snowe delivered to the New England Chapter’s Annual Conference two weeks ago in Portland, Maine.

   [At this point in Mr. Keeling’s remarks, a seven minute video was shown of remarks by Senator Snowe reviewing her knowledge of ESOP companies in Maine, her work to protect ESOPs from the pernicious DOL proposal, her work in supporting legislation to create more private company ESOPs, and her pledge as a member of the Senate tax committee to work to keep all ESOP tax laws intact during the tax reform work of Congress. The video will be available on The ESOP Association’s YouTube Channel.]

So there is the proof that grassroots, personal, human, contact that lays out the story of an ESOP company, backed up with materials showing the macro data supporting ESOP policy, not an astroturf, mass email campaign, can persuade elected officials that ESOPs are a good jobs policy, and good for the employees, the company, the community, and our nation.

It’s up to us to convince decision makers that ESOPs are more productive, more profitable, more sustainable, providing locally-controlled jobs.

When we do, we will preserve, and enhance your ESOP for your employees and your company, and for America. We can overcome.

Thank you.

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