ESOPs: Naturally Built for Innovation?

Research suggests that well-run ESOPs may have a big advantage when it comes to spurring employee innovation.

A recent Harvard Business Review article cited several research studies showing that companies tend to be more innovative when:

  • They treat workers well.
  • Workers feel they have job stability.
  • Businesses offer stock options to non-executive employees.

The article speculates that these factors give workers the peace of mind to take short-term risks in the interest of supporting the business’ long term health. HBR Senior Editor Walter Frick writes: “If failure in the short-term is acceptable or even rewarded, and if workers have a stake in the company’s long-term performance, they should be more likely to innovate.”

So treating workers well, giving them job stability, and incenting them to focus on the long term health of the company all spur innovation? Than ESOPs should be innovating in spades.

Here’s why:

ESOPs—and other employee owned firms—provide better job security. During the Great Recession, companies with employee stock ownership were four times less likely to lay off workers than those without such ownership, according to research conducted for the Employee Ownership Foundation.

Data from June 2015, when the economy was clearly out of recession, are even more compelling: Companies with employee stock ownership were more than seven times less likely to lay off workers than other companies in these economically healthier times.

ESOPs focus workers on the long term—perhaps more effectively than stock options. When employees become owners, they are more likely to be focused on the business and its long term interests. And ESOPs might be more effective at these goals than stock options.

ESOPs—because they are retirement plans, conceptually similar to 401(k)s and pensions—are generally easier to understand than stock options. What’s more, workers get these funds when they leave the company, or retire—long term decisions made by them, not the business.

And because ESOP funds are distributed only upon leaving the business or retiring, they encourage workers to focus on the business for the duration of their tenure, or even their careers. Long term, indeed.

Well-run ESOPs treat employees like owners. (In other words, well.) ESOPs may be well run or poorly run, but the ones that are run well encourage participation among employee owners, solicit their feedback, empower them to improve the business, and educate them on the financial inner workings of the firm.

When employee owners participate in running the business, they generally treat themselves well and with respect. (They would be foolish to treat themselves poorly, wouldn’t they?)

So by doing what they do naturally, ESOPs should do a superior job of spurring innovation. Just one more piece of evidence showing that ESOPs are good for employees and businesses alike.

(This article originally appeared in the January 2016 ESOP Report.)

September ESOP Report Available

The September 2015 ESOP Report newsletter is now available for members. To access this month’s issue, you’ll need to sign into The ESOP Association’s website. The Member Sign In button is located at the top of the page.

To get to the ESOP Report, click Meet & Learn. A link to the ESOP Report is located on the left side menu.

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August 2015 Link List

2015 Employee Ownership Month Poster Available

2015 Employee Ownership Month Kit Available!

ESOP Association President Visits Omni Cable

ESOP Company News Part 7: Congressman Reid Ribble Visits Hatco Corporation

Moving to the Offense. Touchdown for ESOPs on the Horizon?

ESOP Company News Part 6: ComSonics Meets with Congressman Goodlatte

August 2015  ESOP Report Published

ESOP Company News Part 5: Restek Meets with Congressman Glenn Thompson

August 2015 Outside Board Registry Available

ESOP Company News Part 4: PPI Meets with Senator Joni Ernst

ESOP Company news Part 3: Travel and Transport Meets with Congressman Ashford

ESOP Company News Part 2: Representative Grothman Visits Priority Sign

ESOP Company News: Omni Cable Celebrates Vesting Day

ABCs of ESOPs — Are You an ESOP Guru? Be One!

 

Moving to the Offense. Touchdown for ESOPs on the Horizon?

Please note, the following article originally ran as the Washington Report column in the August 2015 issue of the ESOP Report, the newsletter of The ESOP Association.

In the first decade or so of the 21st Century, after the perfection of the S ESOP law — which was being abused by one and two person 100% S ESOPs — at the turn of the Century, the general mantra of the Association’s government relation’s message has been: “The best defense is a good offense.” In non-sports terms, the thinking is that when a cause has many members of Congress especially, on key Congressional Committees expressing support for specific laws by openly co-sponsoring proposals to expand those laws, cynics about the specific laws are not likely to “win” their efforts to cut back those laws.

Whether we like it or not, there are still men and women in key policy positions among Congressional offices, and among Executive Branch agencies, that see ESOPs as a waste of tax payer money, as bad retirement savings plans due to lack of asset diversification, and as not real ownership. If these people had a chance, which they would if fewer members of Congress openly supported ESOPs, they would maneuver to severely diminish, or to even eliminate laws to encourage creation and operation of ESOP companies.

Since 1990, they have had no time when a movement to cutback or eliminate pro-ESOP laws appeared; why, because on the advice of former super ESOP champion former Congressman Beryl Anthony, the ESOP community has put forth modest, but meaningful pro-ESOP proposals to expand ESOPs. This defense is the best offense strategy led to the passage of the pro-ESOP S ESOP law in 1996, perfected in 1997, and protected in 2001 from attack.

In this 1990 to 2000 time frame, over 100 members of Congress stood up and publicly proclaimed, “I am for ESOPs!” (More comments about this later in this report.)

Now we have, just after a few months post introduction of S. 1212, and H.R. 2096, 23 Senators and 33 members of the House saying, expand ESOP law. These bills, formally titled “Promotion and Expansion of Private Employee Ownership Act of 2015” have a very positive statement of reasons for encouraging ESOPs as an introduction and three similar sections, with the House bill, H.R. 2096, having an additional fourth provision. The section that has garnered the most attention is to permit sellers of S stock to an ESOP to take advantage of IRC 1042 for deferral of gain of the sellers proceeds. (If law, this provision would trigger a substantial increase in the number of S corporations that hold 30% of the company’s stock, but not 100%.). See http://www.esopassociation.org/advocate/advocacy-kit to read all provisions.

Last Congress, support for the House version of H.R. 2096 was a factor that recommendations to eliminate special tax rules in the tax reform proposal developed by former Ways and Means Chair Dave Camp (R-MI) kept all positive rules for ESOPs untouched.

Now, this Congress, in this year, the Senate Finance Committee created task forces to study specific areas of the income tax laws, and the task force reviewing ERISA laws did not just propose that the Senate keep current ESOP tax laws, but encouraged the enactment of S. 1212. In other words, the task force was saying, “Let’s not stand pat for ESOPs; let’s have more ESOPs.”

Then on July 29, the Senate Small Business Committee released a proposal to change tax laws impacting small business that included S. 1212, as Title IV of its proposal.

Bottom line, if the ESOP community remains active, focused, and persistent, in getting more members of Congress, House and Senate, to openly support S. 1212 and H.R. 2096, it is doable, probably not this year, a little more likely next year, but really a possibility after 2016, to once again expand ESOPs, which are good for America, good for the communities where ESOP companies are located, and good for companies with ESOPs, and good for employees.

Number one, have your member of Congress see first-hand your ESOP company to learn what being “ESOP” means; and then politely ask, join your colleagues, Democrats and Republicans, liberal and conservative, and make our nation become more capitalistic, with more ownership by more employees. Sounds like big talk? Yes, and doable.

August ESOP Report Available

The August 2015 ESOP Report newsletter is now available for members. To access this month’s issue, you’ll need to sign into The ESOP Association’s website. The Member Sign In button is located at the top of the page.

To get to the ESOP Report, click Meet & Learn. A link to the ESOP Report is located on the left side menu.

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July 2015 Link Round Up

It’s that time again…see what you might have missed this month.

 

Booth Sales Open for 2015 Las Vegas Conference & Trade Show

 

ESOP Association President Comments on the Passing of Carolyn B. Long

 

Raise the Bar: More Pro-ESOP Bill Sponsors Needed

 

ESOP Chapter Membership

 

2015 Summer Advocacy Kits Available

 

New Center for American Progress Report Touts Capitalism for Everyone

 

Discussions of Capitalism

ESOP Company News for July

July 2015 Legislative Update

The July 2015 ESOP Report was published

Publications Highlight: Administration Handbook

Mid-Atlantic Chapter Round Table Re-Cap

2015 Las Vegas Conference and Trade Show Preliminary Agenda released

RELEASE: Expansion of S ESOPs Recommended by Senate Finance Committee’s Tax Reform Working Group on Savings & Investment

Welcome New ESOP Association Professional Members

Northwest Chapter News

Information on the Las Vegas Conference and Trade Show

Raise the Bar: More Pro-ESOP Bill Sponsors Needed

Please note, the following article originally ran as the Washington Report column in the July 2015 issue of the ESOP Report, the newsletter of The ESOP Association.

No question it was pleasing to have introduced in the House, H.R. 2096, (Promotion and Expansion of Private Employee Ownership Act of 2015), and in the Senate S. 1212 (same title) in late April and early May, with clear cut Republican and Democrat members of the House and Senate as co-sponsors. It is pleasing to see that as of July 7, the bi-partisan support grew, for as of that date, the H.R. 2096 list of sponsors had grown from the original eight to 25 — 17 Republicans and eight Democrats — and S. 1212 had grown from the original 11 to 21 — 11 Republicans and eight Democrats and two Independents, who caucus with the Democrats.

But more support is needed to not only have the provisions of these two bills become law, which would be good, as explained below, but would be very important in making sure what ESOP companies have now that increases their profit after taxes remains the law, in view that sometime in the near future all tax laws will be scrutinized, and many eliminated or reduced.

And the bar we have to measure the support for ESOPs in Congress is the bar set in 1993, when 102 members of the House sponsored pro-ESOP bills, and records indicate the high in the Senate was 29 in 1995. Those numbers made a difference when the Ways and Means Committee in 1996 and the Senate Finance Committee in 1996, without opposition, passed the law permitting S corporations to sponsor ESOPs. [As a general rule, it takes often six to eight years from the day a “new” tax benefit idea is introduced to when the tax committees put the idea into a bill it sends the House or Senate floor.]

To move the Congress to put into law the provisions of S. 1212 and H.R. 2096 that would permit a seller of S stock to an ESOP to defer her/his capital gains tax on the proceeds as the seller of C corporation stock has been able to do since 1985, per the provisions of IRS 1042, and to ease the SBA bias against ESOPs when deciding if a small business that has an SBA preference should continue to have that preference when the ESOP owns more than 50% of the company, there needs to be many more sponsors of H.R. 2096 and S. 1212.

Impossible? No, because there are 124 members of the House and Senate who are ESOP advocates because they have sponsored pro-ESOP bills before this year. So, subtract 46 current H.R. 2096 and S. 1212 sponsors, and there 78 men and women in the House and the Senate that have sponsored bills in prior Congresses that are identical to H.R. 2096 and S. 1212.

ESOP advocates just have to ask, via letter, via an ask during a company visit in August, or a town hall session in August, or at a civic club.

Go to the Advocacy Kit, where there is the suggested letter for co-sponsoring these bills — to get suggested words for the ask.

Resting on laurels because it appears that not having any bad ESOP recommendations in last year’s big tax reform proposal put forward by the former Chair of the Ways and Means Committee, Dave Camp, and recently a task force of the Senate Finance Committee recommended consideration of S. 1212 when it takes up major tax reform legislation in the next two to three years, would be dumb, and dumber.

Let’s raise the bar — let’s have the mark reached in 1993 reached again — let’s expand incentives for creation and operation of ESOPs.

It is doable.

June 2015 Roundup

It’s the last day of June so a monthly wrap-up it is!

Upcoming 2015 July events

Support for ESOPs

The June 2015 Washington Report from the ESOP Report

Welcome to new corporate members

We shared a pic of the 2015 Employee Ownership Month Poster Contest winner

Show your ownership spirit

The June 2015 ESOP Report was published

Registration is now open for the 2015 Employee Owner Retreat

Jobs remained stable in the employee stock ownership sector

ESOP advocates list

Spring Advocacy Kits

Dates announced for the 2015 Employee Owner Retreat

We noted how to access Issue Briefs and the Membership Directory on the website

Carris Reels beats the drum for ESOPs

Ignore “Fur Git It” Messages

Please note, the following article originally ran as the Washington Report column in the June 2015 issue of the ESOP Report, the newsletter of The ESOP Association.

Tax Reform: With the leader of the Senate, Senator Mitch McConnell (R-KY), making it clear that the Senate will not consider a tax reform bill until 2017, when there is a new President, the media, in its usual superficial manner, says the message to America is to forget about tax reform legislation.

Well, depends on one’s perspective, and from the perspective of the media, which is selling a product, the drive is to report on what’s happening now, or what may happen tomorrow, as opposed to focusing on the building blocks of events that might be months, or even years, down the road.

But if one is interested in an outcome that will be determined to a great extent by the building blocks, even the foundational building blocks, what the Senate Finance Committee is doing, and what the Chair of the House Ways and Means Committee, Congressman Paul Ryan (R-WI), is planning to do, is important to ESOP advocates.

To explain with two references: ESOP advocates, and 99% of the readers of this column fall into this category, are very interested in the laws that encourage the creation and operation of ESOPs. Many may not be aware that the last tax reform bill, referred to as the Tax Reform Act of 1986, was not created in 1986 — in other words, it was not a “one-year” legislative activity. In fact, the first comprehensive proposal from the Administration surfaced in 1982. And in fact, the first written proposals in Congress, primarily led by members of Congress, Congressmen Jack Kemp (R-NY) and Richard Gephardt (D-MO), and Senator Bill Bradley (D-NJ), surfaced in the late 70s and early 80s. (People forget that upon taking office, President Carter put to the Congress a tax reform bill that led to a big tax bill, but it was not a true comprehensive tax reform bill).

Second reference point to illustrate that ESOP advocates are not to forget tax reform until 2017. In the first quarter of 2014, the then Chair of the House Ways and Means Committee, after months and months of review by subgroups of the Ways and Means Committee, published a real comprehensive tax reform proposal. In prior years, when a leader, be it the President, or a chair of one of the Congressional tax committees, released his “first” version of tax reform legislation, that proposal becomes the foundation, the first building block as it were, for the final structure. Yes, the final building does not look like the foundation, but it has a foundation that determines many, many aspects of the building’s look. The Camp Tax Reform proposal will still have many of its details in any bill adopted in 2017, or ever later.

What to Do? The ESOP Association’s Washington office continues to monitor, keep an eye on the sub-groups of the Senate Finance Committee that are reviewing tax laws that relate to ESOP creation and operation. The goal is to ensure the positive record of ESOP companies — particularly in having a record of sustainable jobs controlled in the United States — is known by key Senators and their staffs; but most important is to be ready to let the true power behind ESOP laws, ESOP companies and their employee owners, stand out when intense messaging is needed. But, the easiest, and in conjunction with keeping ESOPs front and center in the minds of women and men in Congress is to push for Representatives and Senators to co-sponsor H.R. 2096 and S. 1212 respectively. (For details, Advocacy Kit, or watch Spring Advocacy Kit Intro and Why You Should Invite Your Member of Congress to Visit Your Company.)

In other words, do not take a vacation from making sure those who will eventually decide on tax reform laws know why ESOP laws should be continued and expanded, by using pro-ESOP bills as the tool to make the case for ESOPs, and to have elected officials declare openly a pro-ESOP position.

June 2015 ESOP Report is Available

The June 2015 ESOP Report newsletter is now available for members. To access this month’s issue, you’ll need to sign into The ESOP Association’s website. The Member Sign In button is located at the top of the page.

To get to the ESOP Report, click Meet & Learn. A link to the ESOP Report is located on the left side menu.

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