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Mini-cast 91: ESOP Annual Statements

Bret Keisling looks at ESOP participants' annual statements including what information must be included, the different ways companies can share the information, and what annual statements mean and don't mean.


Mini-cast 91 Transcript

Announcer: 00:03 Welcome to the ESOP Mini-cast, a great way to wrap up the week.

Bret Keisling: 00:13 Hello, my friends. Thank you for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership. I heard from a friend recently, who's an employee owner at a great well-run company that's an 100% ESOP. He got his annual statement and by all accounts, 2019 was a banner year for the company. And the increase in value was higher than anyone expected. Coincidentally, their industry is doing incredibly well during the pandemic. So they're likely to see significant increase in value in the years to come. Because ESOP participants have either recently received or about to receive their annual statements. I thought it would be a great time to take a few minutes and talk about what's required in an annual statement and what they mean and don't mean.

Bret Keisling: 01:01 An annual statement is required by law to be sent to all ESOP participants, which includes current and former employees. There's a certain amount of information that must be included, such as number of shares, allocated to the participant and its change from last year, the amount of vesting the participant has in their shares, and most importantly, the share price as of the valuation date, as well as its change from the previous year.

Bret Keisling: 01:29 Companies have a wide range of options on how to deliver the annual statement. The law is satisfied if the statement is mailed to every participant and the company is under no obligation to add any commentary beyond what's required in the statement.

Bret Keisling: 01:43 A much better way is to convene a meeting of your employees and when possible or appropriate include the former employees who are still participants. Besides sharing information from the annual statement, most importantly share price, companies take the opportunity to delve deeper into their balance sheets, to explain the business factors that were important in the current valuation.

Bret Keisling: 02:05 Some companies choose to share only key data points and look to keep much information confidential from the employees. Other companies adhere closely to open book management practices and will delve deep into the balance sheets or financials, so that employees have a clear sense of how they fit in with the company's financial health. If you listen to previous podcasts, you know, I'm a big fan of using annual statements to bring the whole team together and make sure everyone's on the same page moving forward.

Bret Keisling: 02:35 Whether you get your statement in the mail or attend a company event, there are a couple of things you should keep in mind about what the statement means and doesn't mean.

Bret Keisling: 02:44 The end game for ESOP participants is often considered to be when they get their money. This of course comes to them after their service with the company has ended according to the terms of the company's ESOP plan. So for the vast majority of ESOP participants, an annual statement is just another benchmark of the company's performance. Don't get me wrong; it's a huge and important benchmark. But let's say you're 45 years old, you've been with the company 10 years and you're planning to be there another 20 years. It doesn't matter what the share value is to your payout this year. It won't matter until, normally, the five years during your payout. That's why I believe the annual statement is an opportunity to provide conversation throughout the organization so that all of the employee owners are playing long ball. And like all EO advocates, I believe the more information employees have about their company, the better and more motivated they'll be at their jobs.

Bret Keisling: 03:39 One word about the pandemic and valuations. As we covered in Episode 105 of the podcast with valuation advisor Rob Hilton, because valuations dated December 31st, 2019, or even March 31st, 2020, they're dated before there was much information about the pandemic. So I wouldn't expect the pandemic to have a material effect on those valuations.

Bret Keisling: 04:04 Before I close, I want to circle back to my friend that I spoke about at the top of the podcast. When he told me the company was doing very well the last couple of years, and by luck of the draw they're breaking new records during the pandemic, it immediately raised a concern for me about repurchase obligations. Any company that has unexpected growth and especially growth in share value wants to make sure they'll be able to honor the repurchase obligations that will come due as former employees are paid out. The company that I'm talking about is a very well run company, as I said, generally, and an excellent ESOP and their plan provides a provision that I don't think I've come across in my seven years as a trustee.

Bret Keisling: 04:42 Their plan requires a repurchase obligation every three years. Now it's possible that either by the size of the company or the work that they're doing, whoever drafted their plan thought it was a good idea for this specific company. But I think requiring, as part of the plan, repurchase obligations on a regular basis is an extremely prudent way to make sure that you're not caught unaware.

Bret Keisling: 05:07 With that we're going to wrap up today's episode. Thank you very much for joining us. I hope you'll check back Tuesday when the EO/ESOP Podcast is in summer school. We're bringing you some of our favorite episodes from the past year. Check it out and if you'd like to support our work, I'd really appreciate it if you'd follow or like us where you get your podcasts. With that, stay safe in the pandemic, be good to yourself and those around you. We're in this together and we'll get through it together. This is Bret Keisling; be well.

Bitsy McCann: 05:39 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, 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 Temi, 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.


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