Re: ESOPs entrench management

[Dan Bell <dbell@kent.edu>]

I agree with Charles Upton that ESOPs can be used
as a tool of management to entrench itself against
outside monitors.

>the WSJ has run articles showing how firms have used 
>ESOP's to protect entrenched management against
>outside monitors.

Specifically, the fact that the shares are held in a
trust and voting can be exclusively exercised by a
trustee appointed by the board of directors makes
this possible.

There are cases of an owner selling 90% of the stock
to an ESOP, naming himself the trustee and continuing
to exercise control over 100% of the shares.

Management in public companies also have set up 15% ESOPs
which they control to avoid outside takeovers.

However, where employees set up an ESOP as a mechanism
to establish proactive employee ownership, they typically
structure the plan to include a pass-through of voting
rights which gives them a real voice in electing a board
of directors responsive to their interests. In these
cases, it is reasonable to expect effective monitoring.
--
Dan Bell
International Program Coordinator
Ohio Employee Ownership Center
Kent State University
Kent, OH 44242
(330) 672-3028
(330) 672-4063 fax
dbell@kent.edu
http://www.kent.edu/oeoc/