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ESOPS And The Irish Crisis
Bernard Daly
ESOP Director and Trade Unionist
What is an ESOP ?
• ESOP is the common term used to describe an all
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employee share participation plan which is made up of a
combination of two Revenue approved share schemes
The Employee Share Ownership Trust (“ESOT”) and the
Approved Profit Sharing Scheme (“APSS”) are the two
schemes in question. The ESOT typically acquires and
holds shares before appropriating them to for employees
through the APSS.
Whilst in the ESOT the shares are owned, managed and
controlled by a Trustee company
ESOP Structure
Transformation
Purchase
5% Stake
9.9% Stake
ESOT
APSS
Individual Employees
Why ESOPS ?
• Different to other schemes
• Long term and collective
• Role on Board of Founding Company
• Influence on Founding Company
• Similar terms
• Anti-dilution
• Financial Reward for Employees
Corporate Governance
• Typical ESOP Trustee Company Board– 4 elected or nominated employee reps
– 2 nominated by founding company
– 1 independent professional director
Management delegated to
Secretary/administrator
Corporate Governarnce
• ESOPS very successful until current crisis
in protecting the interests of employees
• Some ESOPS had increased their stake
beyond 14.9%
• ESOPs highly influential in blocking
unwelcome takeovers
• Other ESOPs not so influential
• Difficulties for ESOPs in particular sectors
Trade Union Analysis
• EFP should fit in with TU analysis of good sustainable
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companies
Need for long term investors and stakeholder
participation in times of change
Traditional I.R. structure not capable of coping with
delivering the scale of change in the timescales required.
New Partnership model required to deal with current
crisis.
Opportunity at present for employees to invest on
favourable terms
Irish Crisis
• Global crisis gave rise to Irish banking crisis
• Irish banks engaged in irresponsible lending to housing and
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property sectors
Lack of regulation, poor corporate governance
Rise of crony capitalism
Property bubble created giving illusion of wealth
Collapse of banking nearly lead to collapse of state as state
guaranteed private bank debt
IMF/EU bailout of €85 billions necessary to cover bank bail out and
government spending following the withdrawal from the markets
Major austerity programme to reduce fiscal deficit from 30% to less
than 3% of GDP by 2015
National problems exacerbated by Eurozone crisis
Facts on Irish Economy
• Growth rate has been negative and economy will grow only very
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slowly over the next 3 years
Unemployment is high at 14.5% and is not projected to decrease
very much
Population increase of 8% between 2006 and 2010
10% of population born outside the State
Emigration has recommenced but our well educated workforce is
now more mobile
National debt to peak 118% of GDP by 2013 with strong possibility
of second bailout
Fiscal deficit of 8% of GDP
One major positive is the continued strong performance of the
export sector
Problems for ESOPS and Share
Schemes Generally
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Downsizing and restructuring of companies
Collapse in share values
Reduction or non-payment of dividends
Changes to tax incentives
Financial problems for individual schemes
Most ESOPs have borrowing commitments
Greater need for Trade Unions to prioritise jobs
and pensions
Employee Questions
• Where were the regulators ?
• Where were the rating agencies ?
• Where were the auditors ?
• Where were the institutional shareholders?
• Corporate Governance failure ?
• Concern for Future Employee
participation?
Lessons of Current Crisis
• Need to manage the Eurozone and Global
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Economy better
Markets are not always self-correcting
Unregulated markets may reduce and not
improve social efficiency
Maximisation of shareholder value can be no
longer the sole way to guide business
Sustainable companies funded by long term
capital is the way to go
Current crisis has been a setback for EFP
generally and ESOPs in particular but should not
necessarily be so
ESOPs as a Response
• 1980s experience very valid in the context
of the current Irish crisis
• Similar economic difficulties overcome
• Economy prospered until the excesses of
the Celtic Tiger
• ESOPs became a feature of the
privatisation programme in Ireland and
will do so again
Benefits
• Creates a relationship beyond the wage
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relationship
Behaviour modifications
Aligns stakeholder interests in productivity and
performance
Long term loyalty and commitment
Spill over into IR environment
Gains for society in general are significant in
terms of redistribution effects and social
cohesion generally
ESOPs And Europe
• Set to become a feature of EU economies due to the
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aging of Europe’s population resulting in problems
around business succession
In France and Germany it is estimated that 33% of
owner entrepreneurs will retire in the next 10 years
This could affect up to 2.8 million workers and 690,000
SME’s every year
The successful transfer of ownership is therefore vital for
both economic and social reasons
Increasing interest in how they work at EU Commission
level
Apart from Ireland, there are ESOPs in UK and in other
EU countries such as the giant Voestalpine steel
company in Austria
Conclusions
• ESOPs must be seen as a part of the solution to
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the current global economic crisis
Great opportunity now to persuade governments
and EU to pass legislation and provide greater
incentives for companies to introduce ESOP
schemes
Need for education of workers, trade unions,
employers, politicians and the general public