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Employee Participation in Formal
Governance in an ESOP Company
Christopher Mackin
Ownership Associates, Cambridge, MA
www.ownershipassociates.com
ESOP Association Las Vegas Meeting
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© 2004 Ownership Associates
November 5, 2004
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Involvement is not inevitable
[Expectations] about
involvement are inevitable
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Distinguish between:
• The Legality of
Ownership
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• The Psychology
of Ownership
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With both the Governance and the
Participation challenge …
• Congress (ERISA) sets a very modest
floor – the legality
• You set the ceiling – the psychology
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Distinguish Between:
Governance and Participation
Governance
• Strategic level
guidance and
oversight
• Board of Directors,
other advisory
groups
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Participation
• Involvement at the
local, departmental
level in decisions
regarding the work
itself
• Teams and groups
of teams companywide
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Minimum ESOP Governance
Requirements
• Produce and distribute Summary Plan
description
• Provide access to plan design documents
• Provide annual account statements
• Vote “pass through” to vested participants
on “super-majority” issues, e.g. merger, sale
of substantially all assets, dissolution
• ESOP Trustee votes shares for Board of
Directors
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Two Governance Challenges
• Board of
Directors
•
•
•
•
•
• Trustees
Elections – who gets to vote?
Qualifications of Candidacy – who gets to run?
Responsibilities – what do they do?
Liabilities – what are the risks?
Culture – what difference does it make in an
employee owned company?
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Board of Directors - Elections
1. What are shareholder elections about?
• Selection of the Board of Directors and
auditor
2. Who does the electing – for the Board?
Conventional Co.
•Shareholders
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?
ESOP Company
•Shareholders
•Trustee
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Board of Directors:
Who Gets to Serve?
In a conventional company
In an ESOP company
• Qualified persons who can
help solve problems and
grow the company.
• Qualified persons who can
help solve problems and
grow the company
• Independent Directors
• Management Directors
• Non Management Directors
• Independent Directors
• Management Directors
• Non Management Directors
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Board of Directors
• Independents
• Managerial
• Non-Managerial
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 What is the best Ratio?
 Too many insiders and you have a
management meeting
 Board discussions should be as much, if not
more, externally focused than internally
focused
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Board of Directors – Culture Effect
- Expectations Effect
• The Board Room is perceived as the “last
cloister” of the powerful and privileged
• The “Black Box”
• If transparency and increased responsibility
is the goal, company’s need to gradually
remove cloisters
• Eventually, some form of non-managerial
participation
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Board of Directors – Non Managerial
Employee Involvement
• If qualifications are lacking … consider
indirect representation, with nonmanagerial employees choosing from
among qualified independents
• Start with non-voting “observer” status
• Board of Directors training to increase
the pool of qualified candidates
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Trustees 1
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Conventional Co. (401K) In an ESOP company
• Management names
• Management names
trustees – internal or
trustees – internal or
external
external
• Legal/moral obligation • Legal/moral obligation
to serve the best
to serve the best
interests of
interests of
beneficiaries even if
beneficiaries even if
in conflict with
in conflict with
management
management
• Trustees vote
company stock
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Trustees 2 – Appoint or Elect?
Who Are Trustees?
• Individual
• Group (Board of Trustees)
• Institution
 If a group then becomes power center
 Best to appoint
 Focus election energy on Board of Directors
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The Governance and the Participation
challenge poses a fork in the road.
You choose …
1. Fly low – emphasize ESOP as a benefit
Or
2. Fly high – start the journey toward an
ownership culture
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Thoughts on Participation, as
distinguished from Governance
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The Ownership Culture Survey™
Employee Comments
“Ownership implies decision making.”
“Let me have a say, where appropriate,
in company decisions.”
“For ownership to work, things must
be done democratically.”
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I think that, on some issues, I should leave the decision
making to managers with specialized knowledge.
60%
45%
32% 31%
30%
15%
1%
6%
11%
16%
3%
0%
1
Disagree
2
3
4
Neutral
5
6
7
Agree
unpublished data from the Ownership Culture Survey™
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Standard List of Corporate Decisions
1.
Physical Working Conditions
2.
Election of Employees’ Committee
3.
Speed of Production
4.
Job Assignments
5.
Safety Rules and Practices
6.
Quality Standards and Measurement
7.
Hiring
8.
Promotions, Performance Evaluation
9.
Equipment Layout
10. Asset Purchases
11. Employee Compensation and Benefits
12. Firing
13. Marketing and Advertising Strategies
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14. Raising Capital, Relationships with
Banks and Investment Groups
15. Product, Technology, and Investment
Strategy
16. Lay-off Policy, Employment Levels
17. Management Compensation
18. Distribution of Profits (dividends,
reinvestment, debt reduction)
19. Selection and Oversight of Senior
Management
20. Constitutionalism: Setting and Moving
Decision-Making Boundaries
21. Selection of Board of Directors
22. Fate of the Company: merger, sale,
major location change
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Influence Allocation Chart
OVERALL POLICY
AND STRATEGY
CORPORATE
Managerial
Operations
DEPARTMENT
Local Policy,
Planning and
Coordination
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22. Fate of the Company: merger, sale,
major location change
21. Selection of Board of Directors
20. Constitutionalism: Setting & Moving
Decision-Making Boundaries
19. Selection and Oversight of Senior
Management
18. Distribution of Profits (dividends,
reinvestment, debt reduction, etc.)
17. Management Compensation
16. Lay-off Policy, Employment Levels
15. Product, Technology, and
Investment Strategy
14. Raising Capital, Relationships with
Banks and Investment Groups
13. Marketing & Advertising Strategy
12. Firing
11. Employee Compensation & Benefits
10. Asset Purchases
9. Equipment Layout
8. Promotions, Performance
Evaluation
7. Hiring
6. Quality Standards and Measurement
5. Safety Rules and Practices
4. Job Assignments
3. Speed of Production
2. Election of Employees’ Committee
1. Physical Working Conditions
2001 Ownership Associates, Inc.
Cambridge, MA.
© 2004 Ownership Associates
Shareholder Voting
Board of Directors
Management
Decision
Making
RepresentVoting
ation
Types of Influence
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Influence Allocation Chart
OVERALL POLICY
AND STRATEGY
CORPORATE
Managerial
Operations
DEPARTMENT
Local Policy,
Planning and
Coordination
21
22. Fate of the Company: merger, sale,
major location change
21. Selection of Board of Directors
20. Constitutionalism: Setting & Moving
Decision-Making Boundaries
19. Selection and Oversight of Senior
Management
18. Distribution of Profits (dividends,
reinvestment, debt reduction, etc.)
17. Management Compensation
16. Lay-off Policy, Employment Levels
15. Product, Technology, and
Investment Strategy
14. Raising Capital, Relationships with
Banks and Investment Groups
13. Marketing & Advertising Strategy
12. Firing
11. Employee Compensation & Benefits
10. Asset Purchases
9. Equipment Layout
8. Promotions, Performance
Evaluation
7. Hiring
6. Quality Standards and Measurement
5. Safety Rules and Practices
4. Job Assignments
3. Speed of Production
2. Election of Employees’ Committee
1. Physical Working Conditions
2001 Ownership Associates, Inc.
Cambridge, MA.
© 2004 Ownership Associates
Shareholder Voting
Board of Directors
Management
Employee Participation
Committees/Task Forces
Work Teams
Direct
Influence
Shared Consultative
Influence
Influence
Representative
Influence
Types of Influence
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Case Study 1
•Over 1,000 employees at 12 locations.
•Public Company.
•Minority ESOP Ownership.
•Financial Difficulties.
•Recent Rescue by Outside Investors.
•Multiple Unions.
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Employees at [OurCo] have real influence over
company-wide decisions.
50%
40%
30%
20%
10%
0%
1
Disagree
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© 2004 Ownership Associates
2
3
4
Neutral
5
6
7
Agree
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Case 1: Involvement Strategy
1. Establish Steering Committee
2. Organizational Assessment
3. Convene “RapidResponse” Conferences
• “Low Hanging Fruit”
• Enlist Change Agents
4. Task Teams: Analysis and Recommendations
5. Decide on Recommendations; Report Back
6. Evaluate the Process
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© 2004 Ownership Associates
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Employees at [OurCo] have real influence over
company-wide decisions.
50%
40%
30%
20%
10%
0%
1
Disagree
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© 2004 Ownership Associates
2
3
4
Neutral
5
6
7
Agree
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Case Study 2: Carris Reels
•About 1,000 employees at 8 locations.
•100% family-owned until 1995.
•47% ESOP-owned; committed to 100%.
•Manufacturing.
•Self-designed ESOP.
•Corporate Steering Committee.
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Case 2: Involvement Strategy
1. Review / Approval by Steering Committee
2. Organizational Assessment
3. Company-wide “Ownership Culture” Training
4. Review / Adaptation by Steering Committee
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1
Fate of the Company: merger, sale, etc.
Selection of Board of Directors
Approve Minutes
Holding Senior Management Accountable
Selection of Senior Management
Employee Compensation
Senior Management Compensation
Distribution of Profits
Capital Improvement (Investment Strategy)
Manufacturing Technology
Acquisitions / Start Ups
Product Development
Raising Capital, Relationships with Banks and Investors
Marketing & Advertising Strategy
Management (Exempt) Hiring
Lay-off Policy, Employment Levels
Product Pricing
Equipment Purchases
Wage Changes, Raises
Setting Production Standards
Allocation of Employee Benefits (Based on Sr. Mgmt Budget)
Firing
Communications / Training
Quality of Worklife Issues
Promotions
Equipment Layout
Setting Safety Rules and Practices
Setting Quality Standards and Measurement
Disciplinary Action
Performance Evaluation
Determining Work Assignments
Enforcing Quality Standards and Measurement
Hourly (Non-Exempt) Hiring
Enforcing Safety Rules and Practices
Local Work Environment
Participate in Taskforces and Committees
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Pre-ESOP
Present
Chart B -- The Present
38 Fate of the Company: merger, sale, etc.
Shareholders
37 Selection of Board of Directors
36 Approve Minutes
Board of Directors
35 Holding Senior Management Accountable
34 Senior Management Compensation
33 Distribution of Profits
President / Vice President
32 Capital Improvement (Investment Strategy)
31 Manufacturing Technology
30 Selection of Senior Management
29 Acquisitions / Start Ups
Senior Management
28 Product Development
27 Raising Capital, Relationships with Banks and Investors
26 Employee Compensation
25 Marketing & Advertising Strategy
24 Management (Exempt) Hiring
23 Constitutionalism / Governance
22 Quality of Worklife Issues
21 Communications / Training
20 Allocation of Employee Benefits (Based on Sr. Mgmt Budget)
19 Firing
18 Lay-off Policy, Employment Levels
17 Product Pricing
16 Equipment Purchases
15 Site
Setting
Production Standards
Management
14 Equipment Layout
13 Setting Safety Rules and Practices
12 Setting Quality Standards and Measurement
11 Wage Changes, Raises
10 Performance Evaluation
9 Promotions
8 Disciplinary Action
7 Hourly (Non-Exempt) Hiring
Department Managers*
6 Enforcing Safety Rules and Practices
5 Enforcing Quality Standards and Measurement
4 Determining Work Assignments
3 Election of Steering Committee Representatives
Supervisors*
2 Participate in Taskforces and Committees
Employees
1 Local Work Environment
Shareholders*
Board of Directors
President / Vice President
Senior Management
Types of Issues ("Y-axis")
Types of Issues ("Y-axis")
Chart A -- The Past / Pre-ESOP (1994)
Steering Committee
Site Management
Department Managers**
Supervisors**
Employees
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Types of Issues ("Y-axis")
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Fate of the Company: merger, sale, etc.
Selection of Board of Directors
Approve Minutes
Holding Senior Management Accountable
Senior Management Compensation
Distribution of Profits
Capital Improvement (Investment Strategy)
Manufacturing Technology
Selection of Senior Management
Acquisitions / Start Ups
Product Development
Raising Capital, Relationships with Banks and Investors
Employee Compensation
Marketing & Advertising Strategy
Management (Exempt) Hiring
Constitutionalism / Governance
Quality of Worklife Issues
Communications / Training
Allocation of Employee Benefits (Based on Sr. Mgmt Budget)
Firing
Lay-off Policy, Employment Levels
Product Pricing
Equipment Purchases
Setting Production Standards
Equipment Layout
Setting Safety Rules and Practices
Setting Quality Standards and Measurement
Wage Changes, Raises
Performance Evaluation
Promotions
Disciplinary Action
Hourly (Non-Exempt) Hiring
Enforcing Safety Rules and Practices
Enforcing Quality Standards and Measurement
Determining Work Assignments
Election of Steering Committee Representatives
Participate in Taskforces and Committees
Local Work Environment
38 Fate of the Company:
merger, sale, etc.
Shareholders*
Shareholders*
37 Selection of Board of Directors
36 Senior
Management
Compensation
Board
of
Board of Directors
Directors
35 Holding Senior Management Accountable
34
Approve
President / Vice Minutes
President
33 Management (Exempt) Hiring
32 Marketing & Advertising Strategy
Raising Capital, Relationships with Banks and Investors
Senior
Senior 31
Management
Management
30 Product Development
29 Acquisitions / Start Ups
28 Manufacturing Technology
27 Capital Improvement (Investment Strategy)
26 Constitutionalism / Governance
Steering Committee
25 Communications / Training
24 Allocation of Employee Benefits (Based on Sr. Mgmt Budget)
23 Employee Compensation
22 Selection of Senior Management
Steering Committee
21 Distribution of Profits
20 Product Pricing
Site Management
19 Equipment Purchases
Site Management
18 Wage Changes, Raises
Supervisors
17 Quality of Worklife Issues
16 Firing
15 Lay-off Policy, Employment Levels
14 Setting Production Standards
13 Equipment Layout
12 Setting Safety Rules and Practices
11 Setting Quality Standards and Measurement
10 Performance Evaluation
Department Managers**
9 Promotions
8 Disciplinary Action
7 Hourly (Non-Exempt) Hiring
Employees
6 Enforcing Safety Rules and Practices
Supervisors**
5 Enforcing Quality Standards and Measurement
4 Determining Work Assignments
3 Election of Steering Committee Representatives
Employees
2 Participate in Taskforces and Committees
1 Local Work Environment
Types of Issues ("Y-axis")
Chart B -- The Present
PresentBill Carris' Perfect World Vision
President’s
Vision
for CCC
* The ESOP
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Decision-Making Process ("X-axis")
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Governance and Participation:
Finding the Right Blend
• On-going / Bureaucratic initiatives
“Three Yards and a cloud of dust”
Woody Hayes
• Major Events
“A Shot of Espresso”
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Questions
and
Answers
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