Bret Keisling looks briefly at ESOPs' "Leaky Bucket" problem. Despite seemingly robust ESOP creations, there has been an annual net decrease in ESOPs since 2014 and a loss of 8% of ESOPs since 1985, with significantly more terminations in 2021.
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Mini-cast 140 Transcript
Bret Keisling: [00:00:01] Welcome to the ESOP Mini-cast. Thank you so much for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership.
[00:00:15] It's no exaggeration that by many metrics, the ESOP community is in a robust period of time. ESOP conferences routinely sell out, ESOP professionals are generally quite busy and there are a lot of exciting developments with regards to areas such as ESOP financing, just to name one. Many organizations are launching important and interesting initiatives and in many respects, there's more collaboration among the organizations than we've seen in the past.
[00:00:43] In fact, we have the privilege of talking about many of these exciting developments with the very people who are making them happen. Pick any episode from our ESOP Podcast or Mini-cast in the last twelve or thirteen months and you'll hear us amplifying and celebrating so many great things. By the way, you can check out our entire archives of more than 300 episodes at www.EsOpPodcast.com or wherever you get your podcasts.
[00:01:10] Despite all the causes for optimism, there is an elephant in the EO sandbox that gives me pause and every so often tamps down on my enthusiasm. It's called the "Leaky Bucket" problem, and I'm afraid it's going to get worse in 2021.
[00:01:25] The fact of the matter is that there has been a consistent net decrease in the number of ESOP plans. According to the National Center for Employee Ownership, between 2014 and 2018 an average of 263 ESOP plans were created each year. The problem is that the total number of ESOP plans have decreased each year. In 2014, there were 6,717 plans. As of 2018, which is the most recent year I've seen data, there were only 6,501 ESOP plans. That's why this is known as the "leaky bucket" problem. We're putting new ESOPs into creation but we're losing more than we do create.
[00:02:11] It's worth noting that in 1985, there were approximately 7,000 ESOP plans, according to Louis and Patricia Hetter Kelso's book, Democracy and Economic Power: Extending the ESOP Revolution Through Binary Economics. This is a concern because of the historic trend, but I find the current climate particularly troubling.
[00:02:34] As we've discussed on previous podcasts, there are a significant number of ESOP terminations happening in 2021. Ironically, many of the terminations do not seem to be related to the pandemic. Rather private equity has seemed to have taken notice than employee owned companies tend to be very well run and very profitable and they're sweeping in and taking many of our companies out of the EO sandbox.
[00:02:58] We've had lots of discussions on the podcast about terminations. And I've been very clear that while generally I regret when an ESOP is terminated, they're often very good reasons to celebrate, particularly if the termination results in the employee owners obtaining a windfall. So there will always be terminations. But the climate seems different right now. The professional advisors that I speak with are all touching a lot of terminations. And once we have data for this year, I think the net loss will be eye-opening.
[00:03:28] I get to talk to a lot of people in employee ownership, and there's an underlying frustration for many of us that even though we passionately believe that employee ownership is great for our communities, our economy, and even our country and world, we're not really gaining traction. I understand that if you're an ESOP service provider or practitioner who does transactions, whether they're creations or terminations, that you're really busy, probably making good money and it's okay. But for those of us who are interested primarily in an increase of employee ownership, as I said, there can be an underlying frustration.
[00:04:09] So as I was preparing to finalize the script for today as is often the case, I saw something on social media that a friend of mine posted and it just kind of summed up my view and gave me a little bit of encouragement. It's a quote from the Talmud.
[00:04:27] "Do not be daunted by the enormity of the world's grief. Do justly, now. Love mercy, now. Walk humbly, now. You're not obligated to complete the work, but neither are you free to abandon it." [Shapiro, Wisdom of the Sages, 41. Paraphrase of Rabbi Rami Shapiro's interpretive translation of Rabbi Tarfon's work on the Pirke Avot 2:20. The text is a commentary on Michah 6:8.]
[00:04:44] I thought this was a very powerful message for me today and it's a reminder for the many of us who are passionate about employee ownership because what it will do for our world. There are no guarantees that we'll ever find the traction we're looking for. But we need not complete our work, we'll just stay at it. And meanwhile. If we all work together and we keep our focus on the potential and the importance of employee ownership, I believe we're going to find the traction that we all hope will occur.
[00:05:19] Truthfully. I don't have any answers. I just want to amplify my concerns. This is an issue that is very worthy of a full length episode. And if anyone listening would like to come on and talk about it, please reach out to us on social media.
[00:05:35] Thank you for taking the time to listen to this podcast today and I hope you'll join us Tuesday for our primary EO/ESOP podcast. This is Bret Keisling. Be well.
Bitsy McCann: [00:05:46] We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email Bret@KEISOP.com, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T". This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling, and I'm Bitsy McCann.
Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.
A note on the transcript: This transcript was produced by Descript, an automated transcription service. While it has been reviewed by The ESOP Podcast, we can not guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.