The Effect of Employee Stock Ownership Plans on Corporate Profits. Additional Comment

Abstract

September, 1980 edition of Journal of Risk and Insurance includes an article by D. T. Livingston and James B. Henry entitled The Effect of Employee Stock Ownership Plans on Corporate Profits. article is exceptionally poor scholarship. It states a sweeping conclusion about Employee Stock Ownership Plans (ESOPs) without the benefit of having studied plans that are true ESOPs and without the benefit of examining critically important distinctions among the wide variety of plans that are legitimately called ESOPs. Moreover, even if the article had been examining true ESOPs and the necessary distinctions therein, the data presented in no way justify the conclusion that ESOPs have a negative effect on corporate profitability. 1. authors were apparently not studying ESOPs. technical appendix states that the plans studied were employee stock plans established before 1966. There is an enormous difference between an employee stock purchase plan and an ESOP, which is an employee stock ownership plan. Stock plans require employees to put up their own money to buy the stock, and typically own a very small percentage of their sponsoring company. ESOPs rarely involve employee contributions, in order to avoid securities registration problems, and frequently own all or at least a very major portion of their sponsoring company. It is an egregious error to confuse the two. Moreover, the dates of inception of the plans provide another clue that they are not really ESOPs. There were only a handful of ESOPs established before the concept became popularized in 1975, but all of the plans studied in the article were established at least nine years before that time. To criticize ESOPs when one has not studied ESOPs is utterly irresponsible. 2. article makes no attempt to distinguish among different types of employee ownership plans, despite the tremendous differences that exist between different categories of ESOP. Common sense indicates that the percentage of the company owned by its employees ought to have something to do with the ESOP's effect on productivity and profitability. That notion was borne out by the Conte & Tannenbaum study for the University of Michigan's Survey Research Center indi-