Masonry Magazine August 1994 Page. 27
ESOP Gains Majority Control
Since the ESOP is a permanent entity and other shareholders are mortal, the ESOP will eventually own the majority of the outstanding stock. What then? Management by committee can result in decision-making paralysis.
ESOPS FOR CONTRACTORS
Continued from Page 11
ing an untimely cash drain. What's more, losses create job security issues, which are compounded by declines in the value of the retirement fund.
Distribution of Shares Required
At some point in time-termination, retirement, or death-the employee has a right to receive the shares out of his account. The employee may retain the shares or require the company to repurchase them. Widespread stock ownership outside of the employee group is a possible result.
Administrative Problems and Costs
Setting up and maintaining an ESOP have all of the costs and burdens associated with other retirement plans, but with the additional requirement of an annual valuation.
Non-voting Stock Not Allowed
Stock owned by the ESOP must be the "best" class of stock outstanding. Consequently, the use of nonvoting stock to separate control and equity is not possible.
ESOP Gains Majority Control
Since the ESOP is a permanent entity and other shareholders are mortal, the ESOP will eventually own the majority of the outstanding stock. What then? Management by committee can result in decision-making paralysis. Is the risk inherent in the construction process consistent with a retirement fund investment? Will this risk affect management's decision-making?
Reduced Flexibility
The majority stockholder, the Board of Directors, and the ESOP trustee all have a fiduciary responsibility to manage the business for the benefit of all shareholders. The existence of an ESOP will restrict the management from distributing funds arbitrarily and, in general, running the business for the benefit of management or the family.
Financial Disclosure
From a practical perspective, annual financial statements must be shared with plan participants. If you don't want to inform employees of financial status and performance, do not install an ESOP.
Better Alternatives
No matter what problem is being solved with an ESOP, for the typical privately owned construction firm there is almost always a better approach. Explore all of the alternatives before implementing an ESOP program.
Is an ESOP the right vehicle for your construction firm? For 98 of 100 contractors, the answer is clearly no. For the other two, it may be the only viable solution.
However, do not allow yourself to be "sold" an ESOP. In this area, healthy skepticism is the appropriate response.
REPRINTED, with permission, from the "FMI Management Letter," FMI Corporation, 5151 Glenwood Avenue, Raleigh, NC 27612.
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MASONRY-JULY/AUGUST, 1994 27