Employee stock ownership plans (ESOPs) serve a variety of purposes, from providing owners with liquidity to rewarding and retaining valued employees to defending the company against an unfriendly takeover. But some observers suggest that one other benefit of ESOPs -- enhancing productivity -- isn't automatically realized unless voting rights are passed along to shareholder-employees.
While federal law requires that all shareholders in public companies be given one vote per common share, closely held companies don't have to pass through the vote unless specified by state law. And many of them don't. According to David Binns, managing director of the 700-member ESOP Association in Washington, D.C., only 17% of the association's members pass through the vote on major issues.
Fastener Industries Inc., in Berea, Ohio, is one of the exceptions. The 122-employee, $11-million metalworking company has a highly participative management structure that president Richard Biernacki claims helped his business survive the most recent recession with no layoffs or reductions in employee salaries. A crucial element of that structure, acording to both participants and observers, has been the company's willingness to give employees full voting rights.
In a majority-owned company, the vote is a telltale sign that management is serious about worker participation, says Joseph Blasi, a lecturer in social studies at Harvard University, who has done several studies on ESOPs. "If a company sets up employee ownership and doesn't pass through voting rights, it's clear that they have very little interest in labor-management cooperation in even the most rudimentary way," he states. The exception to that rule, he adds, would be a company in which the owner sells equity over a period of time and wants to maintain control of the company until the majority is owned by employees.
At Fastener Industries, for example, employee-owners elect the company's board of directors, a five-person body that currently includes the president, a plant manager, the sales manager, the corporate secretary, and the treasurer. "It's easy to become a member of the board around here," says Biernacki, who is the company's largest shareholder with 4% of the stock. "All you need is 10 employee-owner signatures and you get your name on the ballot."
The company's emphasis on employee involvement seems to have paid off, certainly in morale. The National Center for Employee Ownership, in Arlington, Va., recently studied employee attitudes in 52 companies with ESOPs. Fastener Industries received the highest score. "There is unlimited potential here," notes Frank Nowak, an engineer who has been with Fastener since 1958. "You know that whatever you contribute is for your own future."
DONNA FENN | Inc.com Contributing Editor
Donna Fenn is the author of Upstarts! How GenY Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.