ESOP Committees – How They Interact & Setting up a Communications Committee

ESOP Committees – How They Interact & Setting up a Communications Committee

The ESOP Association 2012 Las Vegas Conference & Trade Show

November 8th & 9th, 2012

Christopher Horner, Dickinson Wright PLLCTom Oettinger, The Onyx Group

Ali Jamshidi, CTL EngineeringJay Simecek, The Ohio Employee Ownership Center

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Agenda:IntroductionsOverview of committees in an ESOP

Legal requirementsThe Onyx ExperienceThe CTL Engineering ExperienceIssues When Creating a Communications CommitteeQ & A

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…… Issues to CONSIDERRolesMission / ScopeStructureMembership / RepresentationTermSelection / ElectionBudgetMeetingsBylaws

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The Big Picture

Linking employee ownership to corporate performance.• Employee ownership is not enough. • Research indicates that employee ownership plus employee

participation leads to increased corporate performance relative to employee ownership alone.

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Common Theme

• Goals: All committees have a common purpose: to facilitate the strategic mission of the corporation.

• Structure: All committees have a common philosophical underpinning: The objectives of the committee should dictate its characteristics.

• Resources: All committees should have access to the resource necessary and appropriate to achieve their objectives.

• Evaluation: All committees should be evaluated and modified to increase efficiency and achieve new strategic objectives.

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What is an “ESOP Committee”?

Administrative (Fiduciary) Committee Communications Committee Other “ESOP Committees”

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Fiduciary Committee

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Fiduciary Committee

Decision-making regarding administration of the Plan• Operation of Plan• Management of Plan assets

Advise the trustee of the ESOT• Dispositions of employer securities

May be a Named Fiduciary Under ERISA• Fiduciary duties

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Communications Committee

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Communications Committee

Decision-making regarding strategic employee ownership objectives (Authoritative)

Advise management and educate and train employee owners (Advisory)

Not necessarily subject to ERISA fiduciary duties

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Legally Required Communications

Summary Plan Description (“SPD”)– Summary of Material Modifications (“SMM”)

Summary Annual Report (“SAR”) Participant Statement Disclose Governing Documents

– Plan Document– Trust Agreement– Form 5500– Beneficiary Designation Elections


Purpose of ESOP Communication Committees

Help implement the strategic vision of employee ownership through communication and education


Roles:

Board sets the vision of employee ownership Management leads with primary role as communicatorsESOP Communication Committee employees involved in learning


Key Communication and Education Roles

Communicate to employees that they are shareholders with a stake in the company’s future

Provide the knowledge and skills needed to think and act like owners

Develop processes for open communication, information-sharing and continual learning

Lead employees to act as owners


CTL Engineering

• Headquartered in Columbus, Ohio

• Started in 1927

• Columbus Testing Laboratories

• 245 employee owners

• 100% employee owned (83% ESOP)

• Engineering and consulting services

• Telecommunications

• Security & Video Surveillance

CTL EngineeringEstablishing CTL’s ESOP

• Eight years discussing with owner• Company performance inconsistent• 1990 made profit, but no cash• Choices:

- Take a loan to pay taxes- Create non-cash deduction

CTL EngineeringESOP Solves CTL Problems

• Viable solution to owner’s tax issues• Company stock contribution of 7% in 1991• Another 7% contribution in 1992• ESOP offered significant advantages• ESOP good for all parties

Owners86%

ESOP14%

CTL EngineeringESOP in Limbo

• Expected people to get on board• People didn’t buy into ESOP concept• Did little communication• ESOP unimportant to most • Owner was disappointed

CTL EngineeringOwner’s Options

ManagementBuyout

OutsiderPurchaser

Sell toESOP

CTL EngineeringOwner Options

• Management preferred ESOP purchase

• Owner unsure ESOP was “right”

• “Tire kickers” visited our facilities

• Owner looking for financial commitment

• ESOP shrinking as people left CTL

CTL EngineeringOwner Sells to ESOP

• ESOP became most viable option• Outside and insiders educate owner• Financial and business benefits• Building ownership culture

Mgmt17%

ESOP83%


CTL Engineering Initiation of Fun Czars

Created to establish a higher moraleNon-executive personnelOne goal…build ESOP spirit and enthusiasmMain result of our efforts…turnover has

decreased and retention has increasedFormal budget submitted and reviewed annually

CTL Engineering Committee Challenges

Mature ESOP• New participants aren’t seeing the

benefit• Rebalancing should help

Multiple officesOver half of employees are in the field

CTL Engineering What’s Worked

Visiting every office every other yearNew hire trainingGuess the Stock ValueESOP representatives in every branchAll events are ESOP eventsESOP monthQuarterly ESOP Advisory

CTL Engineering ESOP Culture ≠ Overnight Success

• Not everyone buys in right away• Needs consistency and repetition• Provide ESOP information in all forms

CTL Engineering All Events=ESOP Events

CTL Engineering Promote Involvement

Contest for best T-shirt design

CTL Engineering What’s Worked - New

Quarterly ESOP Advisory• Submit for a chance to win $100 American Express Gift Card

CTL Engineering Fun Czars Results

Turnover decreasedBuilding ESOP environment/spirit“May I speak to the owner?”Receptionist: “You’re speaking to one.”Think like owners

• Weathered the 2008 economic downturn– Furloughs– Suspended 401k Match

• No layoffs

CTL Engineering – Financial Education

CTL Engineering Stock Value History 1995-2011

0

200

400

600

800

1000

1200

1400

1995 1997 1999 2001 2003 2005 2007 2009 2011


-40

-20

0

20

40

60

80

100

120

140

160

180

Cumulative Stock Return 2005-2011

25%70%562

4.3%17.8%

15%85%6457.3%17.2%

25%110%804.5020.9%33.5%

19.2%129.2%

95924.4%39.9%

-1%128.2%948.70-14.1%6.1%

.3%128.5%

9529.35%24.92%

17.1%145.6%

111522.13%35.94%

Annual changeCumulativeStock ValueS&P 500DJIA

CTL StockS&P 500DJIA

12/ 10 12/ 1110.6%156.2%

123322.13%41.47%

3/ 05 12/ 05 12/ 06 12/ 07 12/ 08 12/ 09

Mission/Guidelines/Bylaws

Initially typically drafted by management or Board of Directors

Committee then revises as needed

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Typical Mission Statement

Support success of ESOP

Support success of Company

Encourage education and understanding of ESOP by employees

Encourage and facilitate development of an ownership culture at the Company

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Scope of Responsibility for ESOP Communications Committee

ESOP Communication? Wages & Benefits? Marketing Strategy for Company Products? Quality Control Issues? ESOP Newsletter ESOP Training? ESOP and Company Celebrations? Annual Participant Meeting? Company Financial Information? Participant Voting (if pass-thru voting applies)? Attend ESOP Conferences and local training?

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Structure of ESOP Committee

Number of members Eligibility for committee membership Term of membership Composition of committee Selection/Election Process Committee Mission/Guidelines/Bylaws Scope of Responsibility

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Number of Members

Odd number to avoid tie votes?• ≤ 4 people – probably too small• ≥ 12 people – probably too large

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Eligibility to Serve on Committee

All employees? Management only? Non-management only? Full-time employees only? ESOP Participants only? ESOP Participants who are at least partially vested only? Fully vested ESOP Participants only?

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Term of Office

1 Year? 2 Years? 3 Years? 1 Year with re-election possible but with majority of

Committee not eligible for re-election? 3 Years with only 1/3 of committee elected each year? Unlimited as long as person is willing to serve?

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Representation of Constituencies

Management vs. Non-management Old vs. New Employees Departments Locations

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Representationon Board of Directors

No representation of Committee on Board Committee Chair on Board automatically Management selects Board member Committee selects/elects Board member

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Committee Selection/Election

Who Conducts selection/election? Who Counts Votes? What are the voting hours? Who’s eligible to vote? 1 Person 1 Vote vs. 1 Share 1 Vote Who defines departments?

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Voting Methodology

Ballot E-mail Phone FAX All of the above Raising hands at a meeting

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Committee Budget

Direct Expenses• Material for events• Registration fees for conferences/seminars• Travel to conferences/seminars/meetings• Newsletter costs• Communication costs

Time spent by committee members

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Committee Meeting Issues

Company time vs. after-hours Paid vs. unpaid Frequency of meetings Length of meetings Priority vs. departmental work assignments

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Selection of Committee Chair

Elected position? Chosen by management? Highest level person on committee? Selected by committee members?

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Typical Bylaws

Contain decisions reached re all the issues we are discussing in this program!

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Typical Guidelines

Detailed policies and procedures for:• Committee elections• Committee officer selection and responsibilities• Committee meetings• Replacement for a departed committee member• Committee functions• Committee members attending ESOP Conferences and

Programs Specification of scope of responsibility

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