Four
timely broad ownership proposals to bring corporate ‘citizens’ back under the
control of civil society
From: Attorney Deborah Groban Olson
Date: October 2, 2002
I. Introduction
The recent corporate
accountability scandal coupled with a bad economy and the recent $15 billion
airline bailout[1] bill shine a
bright light on problems in the relationship between government, large
corporations and local stakeholders (including employees and local
communities). When times are bad, business often seeks government rescue. When
times are good business wants government to disappear. The government rarely
gets the upside opportunity provided to others who invest in private companies.
In the current period, when large corporations are global entities, not bound
by the laws of a single country, they can and do change headquarters to avoid
tax liabilities in their countries of origin. They move production to avoid
civilized (but costly) labor and environmental requirements. Governments must
be very wise long-term investors. Governments must use their financial muscle
and investment dollars to protect the sovereignty and voting rights of citizens
and local stakeholders from the increasing power of global corporations.
Corporate power is organized on a feudal ownership principle, not on a
democratic one.
Broad ownership of
companies by workers has a stabilizing effect on communities. Recent studies by
Blasi and Kruse 2001[2]
and Kardas, Scharf and Keogh 1998[3]
show that privately held ESOP companies generally outperform comparable
non-ESOP companies on business measures and in providing good wages and
diversified employee benefits to their employees.
Under the airline
bailout act, only those companies willing to give up a substantial portion of
their stock are receiving loans[4].
Where the shareholders want the government’s money, but don’t want to offer the
citizens potential gain, they are not receiving the loans. This turns the
bailout dollars into an investment instead of a corporate giveaway.
Like the airline bailout,
Chrysler and its government loan guarantee provides an example of a government
investment policy that worked well, but should be expanded to become a more
general policy. Congress insisted on the employees receiving stock valued at
approximately a 15% interest in Chrysler, when they provided a bailout to help
that company avoid bankruptcy under the Chrysler Loan Guarantee Act of 1979.[5]
The government was repaid. The company survived and did well. The employees
recouped much of their wage reduction when they sold the stock several years
later. Yet, had the employees retained that ownership stake, there might have
been a very different outcome to Daimler's recent ill-fated purchase of
Chrysler, that has harmed Chrysler and led to massive layoffs of US workers.
The Enron situation
does raise important policy issues about broad ownership that should be
addressed such as: 1) Why do we limit our tax incentives for employee ownership
to pension plans? 2) Why don’t we provide other vehicles to broaden ownership
in a diversified way to more citizens? 3) Why don’t we create structures to
give these stakeholders a means of exercising their voting rights collectively
and knowledgeably? The following ownership broadening proposals provide much
needed checks and balances, enabling greater corporate accountability and a
second stream of diversified income to the majority of the population. For a
more extensive discussion of alternatives see the Capital Ownership Group (COG)
paper Bold Steps Towards Ownership for All.[6] (The proposals are described as appendices
because they are referred to as such in a summary of this document.)
II. The Four Proposals
Appendix A: Fair Exchange Investment
and Taxpayer Protection (FEITPA) Act of 2001 – (Draft #1)
"Whereas terrorist acts on Sept.11, 2001 caused great damage and new expense to certain private businesses, including without limitation, airline companies, airport and transit authorities, building owners and leaseholders, insurance companies, vendors to the transit industry; and
Whereas, similar problems may arise for the pharmaceutical, food processing, package delivery and many other types of businesses; and
Whereas such industries are seeking investment from the US government in the form of grants, loans and loan guarantees, to handle the damages and risks of this new situation; and
Whereas many of the firms seeking assistance own or operate assets both within and outside the United States; and
Whereas, many individual taxpayers are also harmed by loss of employment due to circumstances causing many of these companies to seek government grants, loans and/or loan guarantees, tax abatements, favorable licenses, etc. (hereinafter referred to as "government largesse"), and
Whereas, the primary purpose of the government is to protect had defend the rights of its citizens to life, liberty, property and the pursuit of happiness; and
Whereas, corporations, unlike individuals, may be legal persons, but do not hold citizenship in any country;
NOW THEREFORE BE IT RESOLVED that the Congress of the United States shall require that in exchange for any grants, loans or loan guarantees made for or on behalf of any for-profit business entity (hereinafter " the Business") by the United States Government or any of its agencies (hereinafter "the Government"), the Federal Equity Exchange Board (hereinafter "FEEB") shall obtain contracts under which the Government, the Businesss' employees and all current U.S. taxpayers would participate in gain of the participating Business or its security holders through use of common or preferred stock and instruments such as warrants and stock options or other appropriate equity instruments as follows:
A) In exchange for any direct grant of funds to the Business, the Business shall create an employee stock ownership plan meeting the all the requirements of IRC Sec.409 (a) (with the exceptions noted in paragraph B below) and shall contribute qualifying employer securities, as defined in IRC Sec.4975 (e)(7) and (8), with fair market value, as defined in ERISA 29 USC Sec. 1108(e) equivalent to the value of the grant made, and referred to hereinafter as a Fair Exchange ESOP (hereinafter "FEESOP").
B) A FEESOP shall include the following features in addition to the requirements noted in paragraph A above, and (where these conflict with IRC Sec. 409(a), the requirements of this paragraph shall take precedence. These requirements include:
1) The majority of the Trustees of the FEESOP shall be elected on a one vote per person basis by the FEESOP participants pursuant to procedures and regulations established by the FEEB.
2) Allocations to the individual accounts of individual participants in a FEESOP shall be made from one half of the contributed stock;
3) The other half of the contributed stock shall be allocated to the "FEESOP Joint Trust". The FEESOP Joint Trust shall hold its interest in the FEESOP stock for the benefit of current and future employees and the local community. Its Trustees shall be elected as follows: 1/3 by shareholders; 1/3 by the employees on a one vote per person basis; and 1/3 shall be comprised of representatives of local governmental, civic or non-profit organizations nominated by the shareholders and approved by vote of the employees on a one vote per person basis.
C) In exchange for any direct loan of funds or provision of loan guarantees to any Business by the Government, the FEEB shall obtain contracts under which the Government, the Business’ employees and all current U.S. taxpayers would participate in gain of the participating Business or its security holders through use of common or preferred stock and instruments such as warrants and stock options or other appropriate equity instruments.
D) The FEEB's purpose is to utilize the lending capacity of the federal government to accomplish and balance three goals:
1) Broadly distribute "meaningful ownership" among U.S. citizens in the same way that the Homestead Acts of the 1860's made many citizens landowners;
2) While lending and making loan guarantees to stabilize US businesses and the US economy; and
3) Create a second stream of income for citizens as jobs become less permanent.
E) The FEEB shall include five members appointed by the President with the advice and consent of the Senate. However, there must be at least one each from the financial community, one from labor and one from an employee owned business. In carrying out the goals stated in paragraph C above, the FEEB may create revolving loan funds to further enable employee or community ownership programs with repaid loan funds.
F) "Meaningful ownership" shall be interpreted by the FEEB, but shall include both voting and property rights.
Appendix B: Fair Exchange Proposal - Equity Quid
Pro Quo Proposed Legislative Language
(This is a
more generic version of the above FEITPA proposal. The “Fair Exchange”
Proposal (also called “stock or equity quid pro quo”) provides an equity return
to citizens for specific government benefits provided to businesses. The equity
would be used to promote local economic development and local control.)
In exchange for government benefits granted to a business for providing jobs, or government grant of licenses or permits enabling extraction of natural resources or use of collective resources, such as air and water for business purposes, the business shall provide a quid pro quo at fair market value to the commonweal."
Definitions of these terms:
"Commonweal" means private or public entities, including non-governmental trusts, employee trusts, community trusts, stock funds, investment funds, co-operatives, for-profit and non-profit corporations, and other entities provided they met specific tests of bona fide interest in protecting the long term economic, social, ecological and/or cultural interests of the local citizens. These entities should provide the community receiving the benefit with individual accounts to provide citizens with:
1.
wealth creation for their
families;
2.
ability to withdraw and use the
funds (with parameters such as those used by 401(k)s to incentivize a long term
investment horizon for such funds);
When developed in greater detail this definition shall provide mechanisms for responsible
parties, such as labor-venture funds (such as those in Quebec and Manitoba fashioned under the Canadian labor-sponsored investment fund laws), community development financial institutions, credit unions, and other certifiably locally controlled financial institutions to hold the quid pro quo stock responsibly and accountably.
"Government benefits" means any tax deduction, abatement, grant, government subsidized or guaranteed loan, license (e.g. banking and broadcasting), lease, concession, or contract, preparing and/or providing parcels of land, government contracts, and favorable utility rates, use of non-renewal resources, etc. (hereinafter “GBB”)
"Fair market value" has its current definition under the US Internal Revenue Service and the US Tax Court.
"Quid pro quo" means corporate common stock with the greatest voting and dividend rights or preferred stock convertible into such common stock or its equivalent in cash."
As this is an untried idea, several different versions and methods emerged in the COG discussion regarding the types of benefits and community equity that should be sought. We offer them all as possible options.
1. Require that corporate stock be given to an employee ownership trust or a democratically controlled community investment trust such as a Canadian labor venture fund (“commonweal agency”) in exchange for any GBB.
2. Require that corporate stock be given to an employee ownership trust or a “commonweal agency” in exchange for any government license for use of public resources, such as air waves, extending bank credit, extraction of natural resources or pollution of land, water, or air (i.e. depletable GBB).
3. Instead of requiring stock for GBB, provide models that aid and enable local government units to negotiate with corporations to obtain corporate stock in exchange for any GBB. The stock would be held in an employee ownership trust or a “commonweal agency.”
There are also several alternative proposals regarding how to allocate the commonweal agency equity among individuals and a trust entity, including:
1. Create a separate trust within the commonweal agency for the stock of each company involved. Allow stakeholders to choose different mixtures of local trust participation. This would allow the commonweal agency to maintain ownership locally, while permitting local stakeholders to diversify their holdings within the portfolio of commonweal agency stock.
2. A “commonweal agency” may wish to combine individual account plans holding a portion of the stock or dividends, and have the rest held in a development fund that would be used to foster locally controlled business enterprises.
3. All the equity in the “commonweal agency” would be held in a trust and each citizen or stakeholder would hold shares in the trust.
Appendix
C: Proposed Worker Bill of Rights in ESOPs - Sliding Scale Tax Incentives
Make ESOP tax benefits for the corporation and selling
shareholder available on a sliding scale based on the amount of voting stock
meeting the requirements below, or contributed to the plan pursuant to a
collective bargaining agreement. For example, if taxpayers sell or contribute
10% of their stock to an ESOP, they would receive 20% of the ESOP benefits for
which they were otherwise eligible. (The term "taxpayers" is used to
refer to any selling shareholders, estates, or corporate plan sponsors.) If
taxpayers sell or contribute 20%, they would get 40% of the benefits, etc. The
benefits would increase so that once taxpayers sell or contribute 50% or more,
they would be eligible for 100% of the ESOP benefits. Requirements for tax
benefits:
1. Reinstate the previously repealed ESOP lender deduction (IRC Section 133) contingent upon the following requirements, any or all of which may be waived if the ESOP is created through collective bargaining. Either:
(a) more than 50% of the voting stock of the company must be allocated to ESOP participants; or
(b) where the
ESOP owns more than 30% but less than 50% plus, the plan must provide that the
ESOP participants, through the ESOP committee, direct the trustee on how to
vote unallocated shares (in proportion to how they vote their allocated stock
or, as a block, the same as the majority of allocated).
2. The ESOP committee appoints the ESOP trustee.
3. The ESOP committee is either:
(a) elected by the ESOP participants on a one-participant/one-vote basis; or
(b) appointed by management and representatives of all collective bargaining units whose members are or will be plan participants with proportional representation of each bargaining unit, and each non-represented group of employees covered by the plan, so that the ESOP committee membership corresponds to the different classes of participating employees.
4. Participants get either:
(a) voting pass-through on all shareholder issues, including voting for the board of directors, or
(b) the right to direct the ESOP committee through their votes.
This prerogative, however, may be deferred during the term of an ESOP loan pursuant to loan covenants.
5. Voting of ESOP stock shall be on the basis of (a) one participant, one vote or (b) one share, one vote.
6. ESOP appraisals are made available in the same manner as the ESOP plan, and the summary plan description states that copies are to be made available to plan participants upon request for copying cost.
7. These changes presume a corresponding exception be made in the Employee Retirement Income Security Act of 1974 (ERISA) to permit employee owners to direct trustees to vote allocated and unallocated shares as directed, without putting them in the fiduciary bind (created by current law) of having to override those directions if they do not believe them to be in the participants' best interests.
Comments on the Proposed Worker Bill of Rights in ESOPs and the history of IRC Sec. 133:
If Congress is going to encourage employee ownership, employees should get enough control over investment, disinvestment, employment, and other significant corporate policies to make employee ownership a meaningful method of anchoring business in local communities.
The repealed requirement that the Section 133 lender interest exclusion was only available to plans where over 50% of voting stock was in an ESOP was a clumsy method for addressing Congressional concerns. This requirement, simultaneously, impeded the creation of some good employee-driven ESOPs, which need to attract senior equity partners to finance a deal, and encouraged others who might set up ESOPs to turn to other vehicles, like stock purchase plans, that had fewer employee rights. The above-outlined sliding scale would better meet the country's needs for locally owned businesses and tax revenues.
Additionally, by inadvertence, Section 133(b)(7) was drafted so that it did not allow a Section 133 loan to a company providing one participant, one vote. This section should be amended in the next tax act to add a reference to IRC Section 409(e)(5). IRC Section 133(b)(7)(A) would then read:
"The employee stock ownership plan meets the requirements of Section 409(e)(2) or 409(e)(5) with respect to all employer securities acquired by, or transferred to, the plan in connection with such loan (without regard to whether or not the employer has a registration-type class of securities), and . . ."
Appendix D: Summary and Comments on of “Employee
Ownership Act of 2001” (H. R. 2416)
H.R. 2416 is a non-pension form
of tax advantaged majority employee owned and controlled company, introduced
6/28/2001 by Hon. Dana Rohrbacher. The bill
is not reproduced in its entirety because it can be easily obtained from
government sources. This summary covers its salient features and its
relationship to current laws and other proposals herein.
This bill amends the Internal Revenue Code to provide
for tax-exempt employee-owned and employee-controlled corporation (EOECC)
trusts whose primary assets would be company stock of the EOECC. To receive the
large tax exemption under this law, the employees’ trust would own at least 50%
of the company’s voting stock. The stock would have to be voted on a
one-vote-per employee basis.
Its key benefits are the following tax exemptions.
(1)
There shall be no tax on the corporate income of an EOECC.
(2)
The gross income of an employee owner shall not include any proceeds from the
qualified sale of EOECC stock.
(3)
It exempts from income tax the income an employee receives from the sale of the
EOECC stock (to other employees, the EOECC or its trust) during the three years
following a corporation's election to become an EOECC.
(4)
Exempts from capital gains tax the sale or transfer of company stock to an
EOECC or its EOECC trust.
(5)
Establishes a credit against the estate tax for the amount of EOECC securities
considered to have been acquired from or to have passed from a decedent to an
EOECC trust.
Additionally, the bill directs the Comptroller General
to study and report to Congress on Federal regulations and policies affecting
EOECCs. Directs the President to establish a Presidential Commission on
Employee Ownership to study and report on all issues that affect ownership of
businesses in the United States, with a primary focus on the issues that affect
employee ownership of such businesses.
This bill has not received much attention. It is considered too liberal by conservatives because of its majority ownership, one-vote per employee language. It is considered too conservative by liberals because it removes all federal corporate income taxes from the company and from most transactions in the stock. The sliding scale tax incentives proposal in Appendix C is the logical middle ground between these extremes, and is aimed to provide benefits for selling shareholders, management, labor, and owners who want to test the waters before they take a giant leap.
Current ESOP law has gone part way down this path by permitting a 100% employee owned Sub Chapter S corporation to avoid annual income taxes on its shareholder’s retained earnings. Instead they, as ESOP participants, only pay taxes when they cash in their company stock. Additional rules adopted in 2001 to prevent abuse of this valuable tax break by individuals or family groups which collectively own 50% or more of the company’s stock.
Shareholders selling to a Sub S ESOP are not allowed the capital gains deferral provided for sales of Sub C stock to an ESOP. Other S corporation restrictions on classes of stock, number of shareholders permitted and accounting rules, or the tax problems created for non-ESOP S corporation shareholders may also make it unusable for some companies.
Furthermore, because ESOP stock is held in a pension trust, ERISA fiduciary standards control it. This requires the plan trustees to place primary concern on the company as a retirement plan asset. If the employees wish to act as many family owned businesses would, and protect their job security over their retirement security, ERISA blocks them. A non-ERISA form of employee ownership avoids that problem, and enables the employee owners to act more like typical business owners.
Unlike previous ESOP laws, which focused most heavily on being a means of equity compensation, the proposals in this paper focus on anchoring productive capital assets in local communities to protect local sovereignty in the face of global corporate will. Each of the above proposals is designed to work well in a market economy, while broadening the control of local civil society over corporate decisions on investment and disinvestment, job creation, and environmental standards. These proposals can help communities protect the tax base for their schools and community services. Broad ownership by employees and other stakeholders is one key method of taming globalization.
[1] Page 1, column 1 of the Wall Street Journal dated 9/17/01
[2]
“A comprehensive study of all private company ESOPs by Douglas Kruse and Joseph
Blasi of Rutgers, completed in 2001, shows that ESOP companies are much more
likely to gave other retirement plans than matched comparable non-ESOP
companies. The table below shows the percentages of companies having different
kids of plans. “ From National Center for Employee Ownership Q&A on Enron
by Corey Rosen, Executive Director, January 2002
[3]Kardas, Peter, Adria Scharf, and Jim Keogh, 1998 “Wealth and Income Consequences of Employee Ownership: A Comparative Study from Washington State”, paper presented at Shared Capitalism Conference, Washington, D.C. May 22-23, 1998 in COG electronic library http://cog.kent.edu
[4] “Only one applicant, America West Airlines, has successfully completed the process, winning $380 million in loan guarantees in exchange for a government claim on a one–third stake in the airline.”P.19 D. Leonhardt, M. Maynard, “Troubled Airlines Face Reality” New York Times, August 18, 2002 pp. 1,18-19 However, other, less troubled airlines, such as Northwest backed away from the loan request after the government sought a 1/3 stake in America West. “Most airlines are looking at this (the 1/3 equity requirement) as a rough guide and they don’t like what they saw” airline analyst quoted by M. Maynard in “Airlines Shy Away from Loan Guarantees by U.S.” New York Times, January 3, 2002.
[5] . (See D. Olson, “Union Experiences with Worker Ownership”, 1982 Wis. L.R. 729 at 775-777 http://www.esoplaw.com/WisLR%20complete.htm )
[6]
http://capitalownership.org/PapersMay2001/Homestead.htm.