The Record of Employee Ownership

Abstract

0 When a company's CFO sits down to evaluate an employee stock ownership plan (ESOP), the plan's impact on debt service, taxes, labor costs, and other balance sheet issues is examined. When a union leader evaluates an proposal, the principal concern is the impact of the plan on members' financial security. An innovative business leader will look beyond these numbers, however, to ask whether the can be the basis for improved corporate performance, and if so, under what conditions. The taxpayer supporting ESOPs will want to know the answer to those questions as well. Moreover, the taxpayer will want to know if ESOPs really are broadening the ownership of wealth, or simply providing tax breaks for those clever enough to manipulate the system. These larger questions, of course, cannot be answered by the kinds of company-by-company analyses that support the installation of individual ESOPs. Instead, they are research questions that require a broad scope of inquiry. Although ESOPs are only fifteen years old, in the last five years a number of major studies have helped us answer just how well ESOPs are working. I. The Employee Ownership Landscape ESOPs have grown rapidly since 1974, when the Employee Retirement Income Security Act gave them clear legal standing. According to estimates by the National Center for Employee Ownership, at the end of 1988 there were approximately 9,600 and ESOP-like plans covering approximately 9,800,000 employees. Growth seems to have accelerated recently, so that approximately 800 new plans covering close to 1,000,000 workers are now being added each year. These estimates are based on IRS figures for the number of plans and plan participants for which the IRS has issued letters of determination (a tentative plan approval). According to U.S. General Accounting Office data, ESOPs controlled $19 billion in assets at the end of 1986-and this number is estimated to have increased dramatically in the last three years [17, pp. 28-31]. Leveraged ESOPs borrowed no more than $1.2 billion per year through 1986, but borrowed $5.5 billion in 1987, $6.5 billion in 1988, and $24 billion in 1989 [12]. The use of the term ESOP is somewhat mislead-