Are Esops Close Cousins to Cooperatives?

Are ESOPs Close Cousins to Cooperatives?

Phil Kenkel

Bill Fitzwater Cooperative Chair

I recently had a chance to visit with a farm supply firm that was organized as an employee owned stock ownership program (ESOP). When a new employee was hired they received a small portion of their compensation in stock. The stock vested (the employee had full ownership rights to the stock) after a set number of years. At a later date the stock revolved with the value based on an outside valuation of the firm. The structure had some inherent advantages as employees had an incentive to remain with the firm and had “skin in the game.” The firm operated without a CEO. Major decisions were made by a four member board elected from the employee group on a one member one vote basis. Employees were also empowered to make many decisions on their own.

I was struck by the similarities with the cooperative business model. Under that ESOP structure, equity is being constantly created and revolved. The ESOP board members also wear two hats. In their case they have to remember to take off their employee hat and put on their board member hat. Like a cooperative, a closely held ESOP must constantly consider the future obligations of repurchasing the stock. The ESOP board members that I visited with said that their ESOP had to continually grow in order for the model to remain viable.

It is also interesting to note that he ESOP structure solves some problems which also occur in agricultural cooperatives. The employee investment creates liquidity and funds to grow the business. The structure builds human resource capital and provides a built in succession plan. There are also provisions in the tax code that make dividends on ESOP stock deductible under some conditions. In the cooperative business model, only Section 521 cooperatives are able to deduct dividends paid on stock.

It would be interesting to ponder whether a cooperative could establish an ESOP based on preferred stock. That would be a small step down the continuum towards a multi-stakeholder cooperative. Most agricultural cooperatives describe their employees as their most important resource. Agricultural cooperatives are also proud to be farmer owned. Being partially employee owned would be a break from our existing model but I can see some advantages!